New Economics Papers
on Neuroeconomics
Issue of 2009‒10‒24
three papers chosen by

  1. A Relationship Between Risk and Time Preferences By Kota Saito
  2. Banker Compensation and Confirmation Bias By Sabourian, H.; Sibert, A.C.
  3. Overconfidence, Monetary Policy Committees and Chairman Dominance By Carl Andreas Claussen; Egil Matsen; Øistein Røisland; Ragnar Torvik

  1. By: Kota Saito
    Abstract: This paper investigates a general relationship between risk and time preferences. I consider a decision maker who chooses between consumption of a particular prize in one period and a different prize in another period. The individual believes that today’s good is certain, and that, as the promised date for a future good becomes increasingly distant, the probability of his consuming the good decreases. Under these assumptions, this paper shows that the individuals exhibits the common ratio effect, the certainty effect, and the expected utility if and only if he discounts hyperbolically, quasi-hyperbolically and exponentially, respectively.
    Keywords: Allais paradox, hyperbolic discounting
    JEL: D11 D81 D91
    Date: 2009–08
  2. By: Sabourian, H.; Sibert, A.C.
    Abstract: Confirmation bias refers to cognitive errors that bias one towards one's own prior beliefs. A vast empirical literature documents its existence and psychologists identify it as one of the most problematic aspects of human reasoning. In this paper, we present three related scenarios where rational behaviour leads to outcomes that are observationally equivalent to different types of conformation bias. As an application, the model provides an explanation for how the reward structure in the financial services industry led to the seemingly irrational behaviour of bankers and other employees of financial institutions prior to the credit crisis of that erupted in the summer of 2007.
    Keywords: confirmation bias, belief persistence, overconfidence, signalling, credit crisis
    JEL: D81 D82 D83 G21
    Date: 2009–10–12
  3. By: Carl Andreas Claussen (Sveriges Riksbank and Norges Bank (Central Bank of Norway)); Egil Matsen (Norwegian University of Science and Technology and Norges Bank); Øistein Røisland (Norges Bank (Central Bank of Norway)); Ragnar Torvik (Norwegian University of Science and Technology and Norges Bank)
    Abstract: We suggest that overconfidence among policymakers explains why formal decision power over monetary policy is given to committees, while much of the real power to set policy remains with central bank chairmen. Overconfidence implies that the chairman underweights advice from his staff, increasing policy risk if he alone decides. A committee with decision power reduces this risk, because it induces moderation from the chairman. Overconfidence also yields disagreement and dissent in the committee, consistent with evidence from monetary policy committees. As the chairman is on average better informed, through his wider access to the staff, this would give him a suboptimal influence if policy is set through simple majority voting. Giving the chairman extra decision power, through e.g. agenda-setting rights, restores his influence. A monetary policy committee with a strong chairman balances the risks and influence distortions that occur if policymakers are overconfident.
    Keywords: Central Bank Governance, Monetary Policy Committees, Overcon?dence, Agenda-setting
    JEL: D02 D71 E58
    Date: 2009–10–13

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