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on Experimental Economics |
| By: | Rudolf Kerschbamer ; Matthias Sutter ; Uwe Dulleck |
| Abstract: | Credence goods markets suffer from inefficiencies caused by superior information of sellers about the surplus-maximizing quality. While standard theory predicts that equal mark-up prices solve the credence goods problem if customers can verify the quality received, experimental evidence indicates the opposite. We identify a lack of robustness with respect to heterogeneity in social preferences as a possible cause of this and conduct new experiments that allow for parsimonious identification of sellers' social preference types. Our results indicate that less than a fourth of the subjects behave in accordance with the standard assumption on preferences, the rest behaving either in line with other forms of selfish or in accordance with different variants of non- selfish social preferences. We discuss consequences of our findings for institutional design and agent selection. |
| Keywords: | Credence Goods, Expert Services, Social Preferences, Distributional Preferences, Other-Regarding Preferences, Behavioral Economics, Experimental Economics |
| JEL: | C72 C91 D82 |
| Date: | 2015–02 |
| URL: | http://d.repec.org/n?u=RePEc:inn:wpaper:2015-04&r=exp |
| By: | Tiziana Assenza (Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore and CeNDEF, Amsterdam School of Economics, University of Amsterdam ); Jakob Grazzini (Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore ); Cars Hommes (CeNDEF,Amsterdam School of Economics, University of Amsterdam and Tinbergen Institute ); Domenico Massaro (CeNDEF, Amsterdam School of Economics, University of Amsterdam and Tinbergen ) |
| Abstract: | We present results from 50-rounds experimental markets in which firms decide repeatedly both on price and quantity of a perishable good. The experiment is designed to study the price-quantity setting behavior of subjects acting as firms in monopolistic competition. In the implemented treatments subjects are asked to make both production and pricing decisions given different information sets. We investigate how subjects decide on prices and quantities in response to signals from the firms' internal conditions, i.e., individual profits, excess demand, and excess supply, and the market environment, i.e., aggregate price level. We find persistent heterogeneity in individual behavior, with about 46% of market followers, 28% profit-adjusters and 26% demand adjusters. Nevertheless, prices and quantities tend to converge to the monopolistically competitive equilibrium and we find that subjects' behavior is well described by learning heuristics. |
| Keywords: | Laboratory Experiments, Price-Quantity Competition, Monopolistically Competitive markets. |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:ctc:serie1:def011&r=exp |
| By: | Herr, Annika ; Normann, Hans-Theo |
| Abstract: | An allocation rule that prioritizes registered donors increases the willingness to register for organ donation, as laboratory experiments show. In public opinion, however, this priority rule faces repugnance. We explore the discrepancy by implementing a vote on the rule in a donation experiment, and we also elicit opinion poll-like views. We find that two-thirds of the participants voted for the priority rule in the experiment. When asked about real-world implementation, participants of the donation experiment were more likely to support the rule than non-participants. We further confirm previous research in that the priority rule increases donation rates. Beyond that, we find that medical school students donate more often than participants from other fields. |
| Keywords: | organ donation,laboratory experiment,vote |
| JEL: | C90 I10 I18 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:dicedp:175&r=exp |
| By: | Mike Farjam ; Oliver Kirchkamp (School of Economics and Business Administration, Friedrich-Schiller-University Jena ) |
| Abstract: | Bubbles are omnipresent in lab experiments with asset markets. But these experiments were (mostly) conducted in environments with only human traders. Today markets are substantially determined by algorithmic traders. Here we use a laboratory experiment to measure human trading behaviour changes if these humans expect algorithmic traders. To disentangle the direct effect algorithmic traders have we use a clean design where we can manipulate only the expectations of human traders. We find clearly smaller bubbles if human traders expect algorithmic traders to be present. |
| Keywords: | Bubbles, Expectations, Experiment, Algorithmic Traders |
| JEL: | C92 G02 |
| Date: | 2015–02–11 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2015-003&r=exp |
| By: | Brocas, Isabelle ; Carrillo, Juan D ; Castro, Manuel |
| Abstract: | We conduct a laboratory experiment of second-price sealed bid auctions of a common value good with two bidders. Bidders face three different types of information: common uncertainty (unknown information), private information (known by one bidder) and public information (known by both bidders), and auctions differ on the relative importance of these three types of information. We find that subjects differentiate insufficiently between private and public information and deviate from the theoretical predictions with respect to all three types of information. There is under-reaction to both private and public information and systematic overbidding in all auctions above and beyond the standard winner's curse. The Cursed Equilibrium and Level-k models successfully account for some features of the data but others remain unexplained. |
| Keywords: | cursed equilibrium; Laboratory experiments; level-k; second price common value auctions; winner's curse |
| JEL: | C92 D44 D82 |
| Date: | 2015–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10377&r=exp |
| By: | Müller, Stephan ; Rau, Holger A. |
| Abstract: | We experimentally analyze the relation of risk preferences and subjects aversion to advantageous inequality as measured by the guilt parameter of the Fehr and Schmidt (1999) model. Our findings reveal a significant negative correlation between subjects risk attitudes and their altruistic behavior. Risk tolerant subjects tend to be selfish, whereas risk-averse people show high levels of altruism. |
| Keywords: | altruism,experiment,risk preferences |
| JEL: | C91 D64 D81 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cegedp:231&r=exp |
| By: | Christian Kellner ; David Reinstein ; Gerhard Riener ; Michael Sanders |
| Abstract: | When and how should a fundraiser ask for a donation from an individual facing an uncertain bonus income? A standard model of expected utility over outcomes predicts that the individual’s before choice – her ex-ante commitment conditional on her income – will be the same as her choice after the income has been revealed. Deciding “if you win, how much will you donate?” involves a commitment (i) over a donation for a state of the world that may not be realized and (ii) over uncertain income. Models involving reference-dependent utility, tangibility, and self-signaling predict more giving before, while theories of affect predict more giving after. In our online field experiment at a UK university, as well as in our laboratory experiments in Germany, charitable giving was significantly larger in the Before treatment than in the After treatment for male subjects, with a significant gender differential. Lab treatments isolated distinct mechanisms: for men, donations were higher in all treatments where the donation’s collection was uncertain, whether or not the income was known. This supports a (self)-signaling explanation: commitments realized with a lower probability must involve larger amounts to have the same signaling power. Our results are directly relevant to fundraising and volunteer-recruitment strategies,and offer further evidence that we need to exercise caution in applying expected-utility theory in the presence of social preferences. |
| Date: | 2015–02–18 |
| URL: | http://d.repec.org/n?u=RePEc:esx:essedp:762&r=exp |
| By: | Duffy, John ; Fehr, Dietmar |
| Abstract: | We report on an experiment examining behavior and equilibrium selection in two similar, infinitely repeated games, Stag Hunt and Prisoner's Dilemma under anonymous random matching. We are interested in the role that precedents may play for equilibrium selection between these two stage game forms. We find that a precedent for efficient play in the repeated Stag Hunt game does not carry over to the repeated Prisoner's Dilemma game despite the possibility of efficient play in the latter game. Similarly, a precedent of inefficient play in the Prisoner's Dilemma game does not extend to the repeated Stag Hunt game. We conclude that equilibrium selection between similar repeated games has little to do with historical precedents and is mainly determined by strategic considerations associated with the different payouts of these similar repeated games. |
| Keywords: | Equilibrium Selection,Precedent,Beliefs,Stag Hunt,Prisoner's Dilemma,Repeated Games,Experimental Economics |
| JEL: | C72 C73 C92 D83 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:wzbmbh:spii2015202&r=exp |
| By: | Gürerk, Özgür ; Bönsch, Andrea ; Braun, Lucas ; Grund, Christian ; Harbring, Christine ; Kittsteiner, Thomas ; Staffeldt, Andreas |
| Abstract: | Recent developments in virtual reality (VR) technology have the potential to revolutionize the way economists do experimental research. With Oculus’ light and affordable head mounted display (HMD) human subjects can literally move and use objects in virtual spaces and interact with others. This technology as well as surround-screen projection systems like CAVEs (Cruz-Neira et al. 1994), allow the experimenter to observe economically relevant behavior and social interaction in a highly immersive and at the same time tightly controlled virtual environment. More than other disciplines, economics focuses on the evaluation of counterfactual scenarios which help to analyze strategic decisions and their efficiency effects. In this note, by means of three examples, we illustrate how experiments in highly IVEs can add value to experimental economics and benefit economic research. |
| Keywords: | experimental economics; virtual reality; immersive virtual environment; risk preferences; real effort; avatar; reflection problem; experimental methodology |
| JEL: | C90 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:62073&r=exp |
| By: | Vanberg, Christoph |
| Abstract: | Erat and Gneezy (2012) conduct an experiment to test whether people avoid lying in a situation where doing so would lead to a Pareto improvement. They conclude that many people exhibit such a "pure lie aversion." I argue that the experiment does not provide a reliable test for such an aversion, and that the evidence does not support the authors' conclusion. I conduct two new experiments which are explicitly designed to test for a 'pure' aversion to lying, and find no evidence for the existence of such a motivation. I discuss the implications of the findings for moral behavior and rule following more generally. |
| Keywords: | Lying; Deception; Morality; Ethics; Experiments |
| Date: | 2015–02–10 |
| URL: | http://d.repec.org/n?u=RePEc:awi:wpaper:0581&r=exp |
| By: | Matteo M. Galizzi ; Jeroen Nieboer |
| Abstract: | We look at the links between the Digit Ratio - the ratio of the length of the index finger to the length of the ring finger – for both right and left hands, and giving in a Dictator Game. Unlike previous studies with exclusively Caucasian subjects, we recruited a large, ethnically diverse sample. Our main results are as follows. First, for Caucasian subjects we estimate a significant positive regression coefficient for the right hand digit ratio and a significant negative coefficient for its squared measure. These results replicate the findings of Brañas-Garza et al. (2013), who also observe an inverted U-shaped relationship for Caucasian subjects. Second, we are not able to find any significant association of the right hand digit ratio with giving in the Dictator Game for the other main ethnic groups in our sample. Third, we find no significant association between giving in the Dictator Game and the left hand digit ratio. |
| Keywords: | testosterone; digit ratio; social preferences; altruism; dictator game |
| JEL: | C91 C92 D44 D81 |
| Date: | 2015–02 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:60982&r=exp |
| By: | Lasse Brune ; Xavier Giné ; Jessica Goldberg ; Dean Yang |
| Abstract: | We implemented a randomized intervention among Malawian farmers aimed at facilitating formal savings for agricultural inputs. Treated farmers were offered the opportunity to have their cash crop harvest proceeds deposited directly into new bank accounts in their own names, while farmers in the control group were paid harvest proceeds in cash (the status quo). The treatment led to higher savings in the months immediately prior to the next agricultural planting season, and raised agricultural input usage in that season. We also find positive treatment effects on subsequent crop sale proceeds and household expenditures. Because the treatment effect on savings was only a small fraction of the treatment effect on the value of agricultural inputs, mechanisms other than alleviation of savings constraints per se are needed to explain the treatment’s impact on input utilization. We discuss other possible mechanisms through which treatment effects may have operated. |
| JEL: | D03 D91 O16 Q14 |
| Date: | 2015–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20946&r=exp |
| By: | Auspurg, Katrin ; Iacovou, Maria ; Nicoletti, Cheti |
| Abstract: | Using an experimental design, we investigate the reasons behind the gendered division of housework within couples. In particular, we assess whether the fact that women do more housework than men may be explained by differences in preferences deriving from differences in gender identity between men and women. We find little evidence of any systematic gender differences in the preference for housework, suggesting that the reasons for the gendered division of housework lie elsewhere. |
| Date: | 2015–02–10 |
| URL: | http://d.repec.org/n?u=RePEc:ese:iserwp:2015-03&r=exp |
| By: | Schofer, Joseph ; Chan, Raymond |
| Keywords: | Architecture, Arts and Humanities, Engineering, Social and Behavioral Sciences |
| Date: | 2014–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:cdl:uctcwp:qt6091n47w&r=exp |
| By: | Ralph-C Bayer (School of Economics, University of Adelaide ) |
| Abstract: | Various experimental studies have shown that the availability of a punishment option can increase the prevalence of cooperative behaviour in repeated social dilemmas. A punishment option should only matter if it is a credible threat. We investigate if the degree of credibility depends on standard strategic equilibrium considerations (i.e. SPNE or NE logic) or stems from a non-strategic motivation such as reciprocity. We find that for punishment to be credible non-strategic motivations are sufficient and that subgame perfection does not further improve credibility. |
| Keywords: | Cooperation, Punishment, Credible Threats |
| JEL: | D03 D62 |
| Date: | 2014–05 |
| URL: | http://d.repec.org/n?u=RePEc:adl:wpaper:2014-08&r=exp |
| By: | Lavecchia, Adam M. (University of Toronto ); Liu, Heidi (Harvard University ); Oreopoulos, Philip (University of Toronto ) |
| Abstract: | Behavioral economics attempts to integrate insights from psychology, neuroscience, and sociology in order to better predict individual outcomes and develop more effective policy. While the field has been successfully applied to many areas, education has, so far, received less attention – a surprising oversight, given the field's key interest in long-run decision-making and the propensity of youth to make poor long-run decisions. In this chapter, we review the emerging literature on the behavioral economics of education. We first develop a general framework for thinking about why youth and their parents might not always take full advantage of education opportunities. We then discuss how these behavioral barriers may be preventing some students from improving their long-run welfare. We evaluate the recent but rapidly growing efforts to develop policies that mitigate these barriers, many of which have been examined in experimental settings. Finally, we discuss future prospects for research in this emerging field. |
| Keywords: | behavioral economics of education, present-bias, student motivation |
| JEL: | D03 D87 I2 J24 |
| Date: | 2015–02 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp8853&r=exp |
| By: | Mikami, Satoru |
| Abstract: | Using a survey-embedded experiment, this paper tests whether the active provision of information can generate support, albeit tentatively, for ODA and/or the intention to participate in development aid among Japanese citizens. Results reveal that the treatment can increase the level of support for ODA on average, especially in terms of the efficient use of money irrespective of citizens’ attributes and pre-intervention opinions on development cooperation. Based on these results, development education featuring Aid-effectiveness is strongly recommended as the most efficient communication strategy. |
| Keywords: | awarness campaign , support for ODA , RCT , aid-effectiveness , Japan |
| Date: | 2014–11–14 |
| URL: | http://d.repec.org/n?u=RePEc:jic:wpaper:84&r=exp |
| By: | Howard White ; Shagun Sabarwal ; Thomas de Hoop ; UNICEF Innocenti Research Centre |
| Abstract: | A randomized controlled trial (RCT) is an experimental form of impact evaluation in which the population receiving the programme or policy intervention is chosen at random from the eligible population, and a control group is also chosen at random from the same eligible population. It tests the extent to which specific, planned impacts are being achieved. The distinguishing feature of an RCT is the random assignment of units (e.g. people, schools, villages, etc.) to the intervention or control groups. One of its strengths is that it provides a very powerful response to questions of causality, helping evaluators and programme implementers to know that what is being achieved is as a result of the intervention and not anything else. |
| Keywords: | evaluation analysis; programme evaluation; research methods; |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:ucf:metbri:innpub752&r=exp |
| By: | Kilic, Talip ; Sohnesen, Thomas |
| Abstract: | Does the same question asked of the same population yield the same answer in face-to-face interviews when other parts of the questionnaire are altered? If not, what would be the implications for proxy-based poverty measurement? Relying on a randomized household survey experiment implemented in Malawi, this study finds that observationally equivalent as well as same households answer the same questions differently when interviewed with a short questionnaire versus the longer counterpart that, in a prior survey round, would have informed the prediction model for a proxy-based poverty measurement exercise. The analysis yields statistically significant differences in reporting between the short and long questionnaires across all topics and types of questions. The reporting differences result in significantly different predicted poverty rates and Gini coefficients. While the difference in predictions ranges from approximately 3 to 7 percentage points depending on the model specification, restricting the proxies to those collected prior the variation in questionnaire design, namely demographic variables from the household roster and location fixed effects, leads to same predictions in both samples. The findings emphasize the need for further methodological research, and suggest that short questionnaires designed for proxy-based poverty measurement should be piloted, prior to implementation, in parallel with the longer questionnaire from which they have evolved. The fact that at the median it took 25 minutes to complete the food and non-food consumption sections in the long questionnaire also implies that the implementation of these sections might not be as overly costly as usually assumed. |
| Keywords: | Rural Poverty Reduction,Regional Economic Development,Social Analysis,Food&Beverage Industry |
| Date: | 2015–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:7182&r=exp |
| By: | ITO Koichiro ; IDA Takanori ; TANAKA Makoto |
| Abstract: | Firms and governments often use moral suasion and economic incentives to influence intrinsic and extrinsic motivations for various economic activities. To investigate the persistence of such interventions, we randomly assigned households to moral suasion and dynamic pricing that stimulate energy conservation during peak demand hours. Using household-level consumption data for 30-minute intervals, we find significant short-run effects of moral suasion, but the effects diminish quickly after repeated interventions. Economic incentives produce larger and persistent effects, which induce habit formation after the final interventions. While each policy produces substantial welfare gains, economic incentives provide particularly large gains when considering persistence. |
| Date: | 2015–02 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:15014&r=exp |
| By: | Campos, Francisco ; Goldstein, Markus ; McKenzie, David |
| Abstract: | Despite regulatory efforts designed to make it easier for firms to formalize, informality remains extremely high among firms in Sub-Saharan Africa. In most of the region, business registration in a national registry is separate from tax registration. This paper provides initial results from an experiment in Malawi that randomly allocated firms into a control group and three treatment groups: a) a group offered assistance for costless business registration; b) a group offered assistance with costless business registration and (separate) tax registration; and c) a group offered assistance for costless business registration along with an information session at a bank that ended with the offer of business bank accounts. The study finds that all three treatments had extremely large impacts on business registration, with 75 percent of those offered assistance receiving a business registration certificate. The findings offer a cost-effective way of getting firms to formalize in this dimension. However, in common with other studies, information and assistance has a limited impact on tax registration. The paper measures the short-term impacts of formalization on financial access and usage. Business registration alone has no impact for either men or women on bank account usage, savings, or credit. However, the combination of formalization assistance and the bank information session results in significant impacts on having a business bank account, financial practices, savings, and use of complementary financial products. |
| Keywords: | Business in Development,Competitiveness and Competition Policy,Business Environment,E-Business,Access to Finance |
| Date: | 2015–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:7183&r=exp |
| By: | Breitmoser, Yves |
| Abstract: | People overestimate the probability that others share their values or preferences. I introduce type projection equilibrium (TPE) to capture such projection in Bayesian games. TPE allows each player to believe his opponents share his type with intermediate probability \rho. After establishing existence, I address my main question: How does projection affect behavior in games? I analyze auctions and distribution games. In auctions, projection implies an increased sense of competition, which induces overbidding in all (first-price) auctions. In addition, it biases the perceived value distribution, which induces cursed bidding in common value auctions. Thus, projection induces a hitherto neglected bias in bidding. It is novel in that it explains behavior across conditions and it is independently founded in psychology. I test projection equilibrium in multiple ways on existing data and find that it substantially improves on alternative concepts, both in isolation and in addition to them. The findings are cross-validated by testing projection of social preferences in distribution games. |
| Keywords: | auctions, overbidding, winner's curse, projection, risk aversion, cursed equilibrium, level-k, social preferences |
| JEL: | C72 C91 D44 |
| Date: | 2015–02–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:62052&r=exp |
| By: | Enrica Carbone ; Xueqi Dong ; John Hey |
| Abstract: | This paper represents an intersection between two lines of research. The first is portfolio choice theory, which underlies much of finance; the second is the elicitation of preferences under uncertainty. The theory of the behaviour of financial markets builds heavily on portfolio choice theory; until recently this has assumed that preferences are of a particularly simple kind. In contrast research on preferences has revealed that people have more sophisticated preferences. This paper tries to bring the two fields together by investigating, in a portfolio choice context, the preferences that are revealed by decisions. In the second of these two fields, researchers are increasingly using allocation problems to elicit the preferences of subjects, believing that such problems are more informative, and perhaps more natural, than other elicitation methods. At the same time portfolio choice theory is itself concerned with an allocation problem. Usually in experimental finance the allocation problems are over Arrow securities each of which pays off only in one state of the world. Instead we study the more realistic case, familiar from finance, in which all assets pay off in all states of the world. To make our study more realistic we frame the problem as one under ambiguity, where the probabilities of the states are not known to the decision-maker. This enables us to compare the performance of some recent theories of behaviour under ambiguity as well as traditional ones (such as Mean-Variance) from the theory of finance. We also identify a ‘rule of thumb’ that decision-makers may be using in this rather complex scenario. This research may help us to understand more fully actual portfolio choice decisions. |
| Keywords: | ambiguity, portfolio choice, preferences under ambiguity, securities. |
| JEL: | C9 D81 G02 G11 |
| Date: | 2015–02 |
| URL: | http://d.repec.org/n?u=RePEc:yor:yorken:15/03&r=exp |
| By: | Valentin Haddad (Princeton University ); Marianne Andries (Toulouse School of Economics ) |
| Abstract: | We propose a theory of inattention solely based on preferences, absent any cognitive limitations, or external costs of acquiring information. Under disappointment aversion, information decisions and risk attitude are intertwined, and agents are intrinsically information averse. We illustrate this link between attitude towards risk and information in a standard portfolio problem. We show agents never choose to receive information continuously in a diffusive environment: they optimally acquire information at infrequent intervals only. In contrast to existing theories, we show the optimal frequency of information acquisition can decrease when risk increases, consistent with empirical evidence. We show information aversion tends to lower significantly the benefits of diversification, leads to a joint evaluation of project gains and their information process, as well as creates scope for the creation of information providers. These results suggest our approach can explain many observed features of decision under uncertainty. |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed014:1091&r=exp |
| By: | Orazio Attanasio ; Sarah Cattan ; Emla Fitzsimons ; Costas Meghir ; Marta Rubio-Codina |
| Abstract: | We examine the channels through which a randomized early childhood intervention in Colombia led to significant gains in cognitive and socio-emotional skills among a sample of disadvantaged children. We estimate production functions for cognitive and socio-emotional skills as a function of maternal skills and child's past skills, as well as material and time investments that are treated as endogenous. The effects of the program can be fully explained by increases in parental investments, which have strong effects on outcomes and are complementary to both maternal skills and child's past skills. |
| JEL: | H31 I24 I25 I28 I3 J38 O1 O15 O54 |
| Date: | 2015–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20965&r=exp |
| By: | Martin Dufwenberg ; Maros ?Servátka ; Radovan Vadovic |
| Abstract: | We develop, and experimentally test, models of informal agreements. Agents are assumed to be honest but suffer costs of overcoming temptations. We extend two classical bargaining solutions ?split-the-difference and deal-me-out ?to this informal agreement setting. For each solution there are two natural ways to do this, leaving us with 2x2 models to explore. In the experiment, a temptations-constrained version of deal-me-out emerges as the clear winner. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:igi:igierp:538&r=exp |
| By: | Eisenbach, Thomas M. (Federal Reserve Bank of New York ); Schmalz, Martin C. (Federal Reserve Bank of New York ) |
| Abstract: | We provide a preference-based rationale for endogenous overconfidence. Horizon-dependent risk aversion, combined with a possibility to forget, can generate overconfidence and excessive risk taking in equilibrium. An “anxiety prone” agent, who is more risk-averse to imminent than to distant risks, has an incentive to distort her future self’s beliefs toward underestimating risk. Such self-deception can be achieved even if the future self is aware of the attempted distortion. We relate our results to the literature on empirically observed overconfidence and excessive risk taking in several domains of financial and other types of decision making.” |
| Keywords: | overconfidence; dynamic consistency; biases; deception; risk taking |
| JEL: | A12 D81 D83 D84 |
| Date: | 2015–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:711&r=exp |