nep-evo New Economics Papers
on Evolutionary Economics
Issue of 2010‒05‒02
nine papers chosen by
Matthew Baker
City University of New York

  1. The Open Method of Coordination (OMC) as an Evolutionary Learning Process By Ania, Ana B.; Wagener, Andreas
  2. The Benefit of Anonymity in Public Goods Games By David Reinstein; David Hugh-Jones
  3. Commutative Prospect Theory and Stopped Behavioral Processes for Fair Gambles By Cadogan, Godfrey
  4. The Behavioral Economics of Crime and Punishment By Sanjit Dhami; Ali al-Nowaihi
  5. Decisions with Endogenous Prference Parameters By Dalton, P.S.; Ghosal, S.
  6. Composite Prospect Theory: A proposal to combine ‘prospect theory’ and ‘cumulative prospect theory’ By Ali al-Nowaihi; Sanjit Dhami
  7. Income Aspirations and Cooperation: Experimental Evidence By Dalton, P.S.
  8. The Behavioral Economics of Insurance By Ali al-Nowaihi; Sanjit Dhami
  9. Cultural Identity, Mobility, and Decentralization By Christopher-Johannes Schild; Matthias Wrede

  1. By: Ania, Ana B.; Wagener, Andreas
    Abstract: We interpret the Open Method of Coordination (OMC), recently adopted by the EU as a mode of governance in the area of social policy and other fields, as an imitative learning dynamics of the type considered in evolutionary game theory. The best-practise feature and the iterative design of the OMC correspond to the behavioral rule "imitate the best." In a redistribution game with utilitarian governments and mobile welfare beneficiaries, we compare the outcomes of imitative behavior (long-run evolutionary equilibrium), decentralized best-response behavior (Nash equilibrium), and coordinated policies. The main result is that the OMC allows policy coordination on a strict subset of the set of Nash equilibria, favoring in particular coordination on intermediate values of the policy instrument.
    Keywords: Open Method of Coordination; Finite-population Evolutionarily Stable Strategy; Imitation; Mobility; Redistribution.
    JEL: H77 H75 C73 I38
    Date: 2009–11–23
  2. By: David Reinstein; David Hugh-Jones
    Abstract: Previous work has found that in social dilemmas, the selfish always free-ride, while others will cooperate if they expect their peers to do so as well. Outcomes may thus depend on conditional cooperators’ beliefs about the number of selfish types. An early round of the game may be played anonymously, so that contributions cannot be traced back to particular individuals. By protecting low contributors from potential sanctions, this encourages selfish types to reveal their true preferences in their play. We offer a simple model illustrating when revelation of types can increase contributions, and when only an anonymous game can separate types. As a proof of concept, we run a laboratory experiment involving a two-stage public goods game with an exclusion decision between stages. An anonymous first stage led to significantly higher stage-two cooperation than a revealed first stage, a slower decline across the 15 repetitions, unusually high final-stage contributions relative to previous work, and greater profits. Statistical analysis shows that the anonymous first stage reduced uncertainty about types, and this preserved cooperation and led to greater efficiency. Our results suggest that customs such as anonymous church donations may play an important role in building social trust.
    Date: 2010–04–21
  3. By: Cadogan, Godfrey
    Abstract: We augment Tversky and Khaneman (1992) (“TK92”) Cumulative Prospect Theory (“CPT”) function space with a sample space for “states of nature”, and depict a commutative map of behavior on the augmented space. In particular, we use a homotopy lifting property to mimic behavioral stochastic processes arising from deformation of stochastic choice into outcome. A psychological distance metric (in the class of Dudley-Talagrand inequalities) for stochastic learning, was used to characterize stopping times for behavioral processes. In which case, for a class of nonseparable space-time probability density functions, we find that behavioral processes are uniformly stopped before the goal of fair gamble is attained. Further, we find that when faced with a fair gamble, agents exhibit submartingale [supermartingale] behavior, subjectively, under CPT probability weighting scheme. We show that even when agents’ have classic von Neuman-Morgenstern preferences over probability distribution, and know that the gamble is a martingale, they exhibit probability weighting to compensate for probability leakage arising from the their stopped behavioral process.
    Keywords: commutative prospect theory; homotopy; stopping time; behavioral stochastic process
    JEL: D81 D70 C0 C02
    Date: 2010–04–26
  4. By: Sanjit Dhami; Ali al-Nowaihi
    Abstract: The Becker proposition (BP) is one of the founding pillars of the modern literature on Law and Economics. It states that it is optimal to impose the severest possible punishment (to maintain effective deterrence) at the lowest possible probability (to economize on enforcement costs). The BP is not consistent with the evidence. This is known as the Becker paradox. Using evidence from a wide range of phenomena we show that none of the proposed explanations for the Becker paradox are satisfactory. The BP has largely been considered within an expected utility framework. We clarify the Becker proposition and its welfare implications under expected utility. We show that BP also holds under rank dependent expected utility and cumulative prospect theory, the two main alternatives to expected utility. al-Nowaihi and Dhami (2010a) recently propose composite cumulative prospect theory that combines prospect theory with cumulative prospect theory. Under plausible conditions CCP is able to resolve the Becker paradox. Our article opens the way for incorporating non-expected utility theories into an economic analysis of criminal activity.
    Keywords: Behavioral economics; Illegal activity; Expected utility theory; Rank dependent expected utility; Prospect theory; Prelec and composite Prelec probability weighting functions; Composite cumulative prospect theory; Punishment functions
    JEL: D81 K42
    Date: 2010–04
  5. By: Dalton, P.S.; Ghosal, S. (Tilburg University, Center for Economic Research)
    Abstract: We relate the normative implications of a model of decision-making with endogenous preference parameters to choice theoretic models (Bernheim and Rangel 2007, 2009; Rubinstein and Salant, 2008) in which observed choices are determined by frames or ancillary conditions.
    Keywords: Decisions;choice;frames;standard;behavioral;welfare.
    JEL: D01 D62 C61 I30
    Date: 2010
  6. By: Ali al-Nowaihi; Sanjit Dhami
    Abstract: Evidence shows that (i) people overweight low probabilities and underweight high probabilities, but (ii) ignore events of extremely low probability and treat extremely high probability events as certain. The main alternative decision theories, rank dependent utility (RDU) and cumulative prospect theory (CP) incorporate (i) but not (ii). By contrast, prospect theory (PT) addresses (i) and (ii) by proposing an editing phase that eliminates extremely low probability events, followed by a decision phase that only makes a choice from among the remaining alternatives. However, PT allows for the choice of stochastically dominated options, even when such dominance is obvious. We propose to combine PT and CP into composite cumulative prospect theory (CCP). CCP combines the editing and decision phases of PT into one phase and does not allow for the choice of stochastically dominated options. This, we believe, provides the best available alternative among decision theories of risk at the moment. As illustrative examples, we also show that CCP allows us to resolve three paradoxes: the insurance paradox, the Becker paradox and the St. Petersburg paradox.
    Keywords: Decision making under risk; Composite Prelec probability weighting functions; Composite cumulative prospect theory; Composite rank dependent utility theory; Insurance; St. Petersburg paradox; Becker.s paradox
    JEL: C60 D81
    Date: 2010–04
  7. By: Dalton, P.S. (Tilburg University, Center for Economic Research)
    Abstract: This article is the first attempt to study the empirical link between income aspirations and cooperation in a one shot public good game. By combining experimental with survey data, we find evidence that the more frustrated people are with their income, the lower is their propensity to cooperate with foreigners and compatriots. The quantitative effect is remarkable: participants who are most frustrated are 46 percent more likely to free-ride on foreigners than those who are satisfied with their income.
    Keywords: Social Preferences;Aspirations;Cooperation;Maslow
    JEL: D01 D6 H4 C9
    Date: 2010
  8. By: Ali al-Nowaihi; Sanjit Dhami
    Abstract: We focus on four stylized facts of behavior under risk. Decision makers: (1) Overweight low probabilities and underweight high probabilities. (2) Ignore events of extremely low probability and treat extremely high probability events as certain. (3) Buy inadequate insurance for very low probability events. (4) Keeping the expected loss fixed, there is a probability below which the take-up of insurance drops dramatically. Expected utility (EU) fails on 1-4. Existing models of rank dependent utility (RDU) and cumulative prospect theory (CP) satisfy 1 but fail on 2, 3, 4. We propose a new class of axiomatically-founded probability weighting functions, the composite Prelec weighting functions CPF) that simultaneously account for 1 and 2. When CPF are combined with RDU and CP we get respectively, composite rank dependent utility (CRDU) and composite cumulative prospect theory (CCP). Both CRDU and CCP are able to successfully explain 1-4. CCP is, however, more satisfactory than CRDU because it incorporates the empirically robust phenomena of reference dependence and loss aversion.
    Keywords: Decision making under risk; Insurance; Composite Prelec probability weighting functions; Composite rank dependent utility theory; Composite cumulative rospect theory; power invariance; local power invariance
    JEL: C60 D81
    Date: 2010–04
  9. By: Christopher-Johannes Schild (University of Marburg); Matthias Wrede (University of Marburg and CESifo)
    Abstract: Regional cultural identity increases trust and facilitates interaction between native citizens ("social capital"). At the same time, it also affects non-native's migration decisions and their utility as it excludes non-native mobile workers from economic interaction within the region. Policies to increase regional cultural identity thus exert an externality that is negative for a basic model where future local productivity is exogenous and random, leading to the result of oversupply of regional culture under decentralization. If migration affects productivity, the basic result of oversupply may be reversed, depending on production technology and the government's objective function. Some positive and normative conclusions for cultural policy are derived.
    Keywords: Decentralization, Labor Mobility, Cultural Policy, Cultural Identity, Social Capital
    JEL: H72 H73 J61 Z13
    Date: 2010

This nep-evo issue is ©2010 by Matthew Baker. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.