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on Cognitive and Behavioural Economics |
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Issue of 2025–08–11
five papers chosen by Marco Novarese, Università degli Studi del Piemonte Orientale |
| By: | Jonathan Benchimol (Bank of Israel); Lahcen Bounader (World Bank); Mario Dotta (Getulio Vargas Foundation) |
| Abstract: | Bounded rationality and limited attention significantly influence expectation formation and macroeconomic dynamics, yet empirical quantification of these behavioral phenomena remains challenging. This paper provides the first cross-country estimation of both micro- and macro-level attention parameters using a structurally identified behavioral New Keynesian model. Employing Bayesian techniques on harmonized data from 22 OECD countries (1996–2019) and ensuring robust parameter identification, we document substantial heterogeneity in behavioral inattention across countries. Our cognitive discounting estimates range from 0.76 to 0.98, with higher values indicating greater attention. We establish three key empirical regularities: (1) attention parameters are positively associated with macroeconomic volatility, supporting rational inattention theory; (2) surprise movements in key macroeconomic variables and online information-seeking behavior significantly influence attention allocation; and (3) institutional quality, particularly government effectiveness, is correlated with attention levels. These findings reveal that attention is both a behavioral and a structural phenomenon, responding to institutional factors and economic conditions. Our results provide an empirical foundation for calibrating country-specific models and yield important implications for the design and transmission of monetary policy under bounded rationality, showing that policy effectiveness may systematically vary with the macroeconomic environment. |
| Keywords: | Cognitive discounting, Myopia, Attention, Bayesian estimation, Behavioral macroeconomics |
| JEL: | E37 E52 E58 E70 E71 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:boi:wpaper:2025.09 |
| By: | Markus Dertwinkel-Kalt; Vincent Eulenberg; Christoph Feldhaus; Jonas Frey; Kevin Breuer; Ben Bruske; Flynn Fehre; Penelope Hoffmann; Cederik Höfs; Nico Klocke; Lucas Schnack; Florian Strunk; Moritz Thiele; Annika Walter; Julia Weinberg; Konstantin Zörner |
| Abstract: | In social dilemmas, cooperation failures often arise due to the absence of mechanisms that prevent free-riding and enhance cooperation. Given the critical role these mechanisms play in sustaining cooperation, why are they so frequently missing? To explore this, we conducted an online experiment testing whether individuals choose to implement such cooperation-inducing mechanisms and why they might refrain from doing so. Participants were introduced to the rules of two public goods games, one of which includes a cooperation-inducing mechanism, while the other does not. Regarding the likelihood of successful cooperation, we found that participants were overly optimistic in the absence of the mechanism and overly pessimistic in its presence. As a result, a majority of subjects preferred the game without the cooperation-inducing mechanism. However, when we corrected participants' beliefs about the actual payoffs obtained in the two games, a majority shifted their preference toward the game with the cooperation-inducing mechanisms in place. |
| Keywords: | free riding, equilibrium effects, misspecified beliefs, spectator design |
| JEL: | D90 D01 C91 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11999 |
| By: | Zijian Zark Wang |
| Abstract: | When decision makers evaluate a sequence of rewards, they may pay more attention to larger rewards and, given attention is limited, less attention to smaller rewards. They may also become less attentive to each reward when attention is spread over a longer period of time. Such reductions in attention could lead to greater discounting of the rewards' values. This paper introduces a novel theory of time discounting based on these assumptions. The resulting discount factors in the theory follow a distribution similar to the multinomial logit function. We characterize such discount factors using two approaches: one based on information maximizing exploration and the other based on the optimal discounting framework. The theory can explain a wide range of anomalies, including the hidden-zero effect, S-shaped value function, and intertemporal correlation aversion. Also, it specifies new mediators for some well-known psychological effects, such as the common difference effect, risk aversion over time lotteries, and the present bias. |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2505.13016 |
| By: | Robin Musolff (University of Bonn, IZA); Florian Zimmermann (University of Bonn, IZA & Max Planck Institute for Research on Collective Goods) |
| Abstract: | Mental models help people navigate complex environments. This paper studies how people deal with model uncertainty. In an experiment, participants estimate a company’s value, facing uncertainty about which one of two models correctly determines its true value. Using a between-subjects design, we vary the degree of model complexity. Results show that in high-complexity conditions people fully neglect model uncertainty in their actions. However, their beliefs continue to reflect model uncertainty. This disconnect between beliefs and actions suggests that complexity leads to biased decision-making, while beliefs remain more nuanced. Furthermore, we show that complexity, via full uncertainty neglect, leads to higher confidence in the optimality of own actions. |
| Keywords: | Mental Models, Beliefs, Attention, Confidence, Representations |
| JEL: | D01 D83 |
| Date: | 2025–07 |
| URL: | https://d.repec.org/n?u=RePEc:ajk:ajkdps:369 |
| By: | Maria Bigoni (University of Bologna, CEPR, and IZA); Michela Boldrini (Bocconi University, IGIER, and RFF-CMCC EIEE); Niccolò Lomys (CSEF and Università degli Studi di Napoli Federico II); Emanuele Tarantino (Luiss University, EIEF, European Commission and CEPR) |
| Abstract: | When faced with unfamiliar options, people often rely on the choices of others. We examine how this reliance affects search decisions through a laboratory experiment. Participants choose between two options whose value can only be discovered through costly sequential searches. Some search in isolation; others first observe the final choice, but not the search process, of a peer. This form of social information improves efficiency, yet behavior systematically departs from theory. When selecting which option to sample first, imitation of the peer’s choice is frequent but not universal; moreover, participants often deviate from the optimal stopping rule, with both under and over-search observed. We introduce treatments that allow participants to choose whom to observe and access signals about the reliability of their peers: these interventions increase imitation and improve welfare. Our findings underscore the role of institutional design in facilitating social search, with implications for platform architecture and information diffusion. |
| Keywords: | Sequential Search; Social Information; Institutional Design. |
| JEL: | D8 C9 D1 |
| Date: | 2025–07–20 |
| URL: | https://d.repec.org/n?u=RePEc:sef:csefwp:755 |