2009-07-17 papers

on Neuroeconomics

Issue of 2009‒07‒17
two papers chosen by

Decision-making Procedures: A General Theory and Its Field Experimental Test By Aldashev, Gani; Kirchsteiger, Georg; Sebald, Alexander
A Model of Overconfidence By Weinberg, Bruce A.

Decision-making Procedures: A General Theory and Its Field Experimental Test

By:	Aldashev, Gani; Kirchsteiger, Georg; Sebald, Alexander
Abstract:	It is a persistent finding in psychology and experimental economics that people's behavior is not only shaped by outcomes but also by decision-making procedures. In this paper we develop a general framework capable of modelling these procedural concerns. Within the context of psychological games we define procedures as mechanisms that influence the probabilities of reaching different endnodes. We show that for such procedural games a sequential psychological equilibrium always exists. Applying this approach within a principal-agent context we show that the way less attractive jobs are allocated is crucial for the effort exerted by agents. This prediction is tested in a field experiment, where some subjects had to type in data, whereas others had to verify the data inserted by the typists. The controllers' wage was 50% higher than that of the typists. In one treatment the less attractive typists' jobs were allocated directly, whereas in the other treatment the allocation was done randomly. As predicted, random allocation led to higher effort levels of the typists than direct appointment.
Keywords:	Appointment Procedures; Procedural Concerns; Psychological Game Theory
JEL:	A13 C70 C93 D63
Date:	2009–07
URL:	http://d.repec.org/n?u=RePEc:cpr:ceprdp:7365&r=neu

A Model of Overconfidence

By:	Weinberg, Bruce A. (Ohio State University)
Abstract:	People use information about their ability to choose tasks. If more challenging tasks provide more accurate information about ability, people who care about and who are risk averse over their perception of their own ability will choose tasks that are not sufficiently challenging. Overestimation of ability raises utility by deluding people into believing that they are more able than they are in fact. Moderate overestimation of ability and overestimation of the precision of initial information leads people to choose tasks that raise expected output, however extreme overconfidence leads people to undertake tasks that are excessively challenging. Consistent with our results, psychologists have found that moderate overconfidence is both pervasive and advantageous and that people maintain such beliefs by underweighting new information about their ability.
Keywords:	overconfidence, behavioral economics, information processing
Date:	2009–07
URL:	http://d.repec.org/n?u=RePEc:iza:izadps:dp4285&r=neu

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