nep-neu New Economics Papers
on Neuroeconomics
Issue of 2009‒12‒11
three papers chosen by
Daniel Houser
George Mason University

  1. Underweighting Rare Events in Experience Based Decisions: Beyond Sample Error By Greg Barron; Giovanni Ursino
  2. Is cross-category brand loyalty determined by risk aversion? By Nadja Silberhorn; Lutz Hildebrandt
  3. The evolutionary dynamics of tolerance By Correani, Luca; Di Dio , Fabio; Garofalo, Giuseppe

  1. By: Greg Barron (Harvard Business School); Giovanni Ursino (DISCE, Università Cattolica)
    Abstract: Recent research has focused on the "description-experience gap": While rare events are overweighted in description based decisions, people tend to behave as if they underweight rare events in decisions based on experience. Barron and Erev (2003) and Hertwig, Barron, Weber, and Erev (2004) argue that such findings are substantive and call for a theory of decision making under risk other than Prospect Theory for decisions form experience. Fox and Hadar (2006) suggest that the discrepancy is due to sampling error: people are likely to sample rare events less often than objective probability implies, especially if their samples are small. The current paper examines the necessity of sample error in the underweighting of rare events. The first experiment shows that the gap persists even when people sample the entire population of outcomes and make a decision under risk rather than under uncertainty. A reanalysis of Barron and Erev (2003) further reveals that the gap persists even when subjects observe the expected frequency of rare events. The second experiment shows that the gap exists in a repeated decision making paradigm that controls for sample biases and the "hot stove" effect. Moreover, while underweighting persists in actual choices, overweighting is observed in judged probabilities. The results of the two experiments strengthen the suggestion that descriptive theories of choice that assume overweighting of small probabilities are not useful in describing decisions from experience. This is true even when there is no sample error, for both decisions under risk and for repeated choices.
    Keywords: experience-based decisions, Prospect Theory, rare event, overweighting, underweighting
    JEL: D81 C91
    Date: 2009–10
    URL: http://d.repec.org/n?u=RePEc:ctc:serie4:ieil0054&r=neu
  2. By: Nadja Silberhorn; Lutz Hildebrandt
    Abstract: The need to understand and leverage consumer-brand bonds has become critical in a marketplace characterized by increasing unpredictability, diminishing product differentiation, and heightened competitive pressure. This is especially true for fast moving consumer goods (FMCG) manufacturers and retailers. Knowing why a customer stays loyal to a brand in multiple product categories is necessary for deriving suitable marketing strategies in the context of a brand extension, yet research on the motives, characteristics, life styles and attitudes of cross-category brand loyal customers has been investigated only in a limited number of studies. We will fill a gap in the literature on cross-category brand choice behavior by analyzing revealed preference data with respect to brand loyalty in several categories in which a brand competes. Provided with purchase and corresponding survey data we investigate the product portfolio of a leading nonfood FMCG brand. We segment consumers on the basis of their revealed brand preferences and, focusing on consumers’ risk aversion, identify cross-category brand loyal customers’ personality traits as determinants of their brand loyal purchase behavior.
    Keywords: cross-category brand loyalty, risk aversion, share of category requirements, customer segmentation
    JEL: M31 C51
    Date: 2009–12
    URL: http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2009-061&r=neu
  3. By: Correani, Luca; Di Dio , Fabio; Garofalo, Giuseppe
    Abstract: This paper incorporates the phenomenon of tolerance, as the ability to accept diversity, into an economic analysis showing how different aptitudes to trust and cooperation can affect economic outcomes. In the economic system we propose, tolerance is associated with the different weight that agents attribute to their own nature and to the institutional parameters in their utility function. We thus construct a model of overlapping generations, showing that the incentives that influence descendants’ predisposition to tolerance depend on both institutional factors, where behaviour is imposed by rules, and on social (or cultural) factors, found in popular customs and established traditions. Our study highlights the absolute impossibility of affirming tolerance through formal rules. In fact, intolerance is a persistent attitude and its control is only possible through constant and continuous interventions on the educational processes of new generations (intolerance trap).
    Keywords: Tolerance; Evolutionary dynamics; Imperfect empathy
    JEL: O17 D02 Z13
    Date: 2009
    URL: http://d.repec.org/n?u=RePEc:pra:mprapa:18989&r=neu

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