New Economics Papers
on Neuroeconomics
Issue of 2009‒12‒19
five papers chosen by

  1. Aging, cognitive abilities and retirement in Europe By Fabrizio Mazzonna; Franco Peracchi
  2. The Illusion of Irrationality By Kontek, Krzysztof
  3. Are People Really Risk Seeking for Losses? By Kontek, Krzysztof
  4. Risk-Adjusted Gamma Discounting By Martin L. Weitzman
  5. Fit and complementarity: cognitive distance and combined competence as predictors of co-operative R&D projects' outcomes in Europe By Zibell, Laurent; Allen, Peter M.

  1. By: Fabrizio Mazzonna (Faculty of Economics, University of Rome "Tor Vergata"); Franco Peracchi (Faculty of Economics, University of Rome "Tor Vergata")
    Abstract: We investigate the relationship between aging, cognitive abilities and retirement using the Survey on Health, Aging and Retirement in Europe (SHARE), a longitudinal survey that offers the possibility of comparing several European countries using nationally representative samples of the population aged 50+. We use a version of the model proposed by Grossman (1972) as a guide for our empirical specification of the age-profile of cognitive abilities. According to the model, retirement plays a fundamental role in explaining the process of cognitive deterioration. Our empirical results confirm this key prediction. They also indicate that education plays a fundamental role in explaining heterogeneity in the level of cognitive abilities.
    Keywords: Aging; cognitive abilities; retirement; education; SHARE
    JEL: J14 J24 C23
    Date: 2009–12–04
  2. By: Kontek, Krzysztof
    Abstract: This short paper shows that the Allais Paradox and the Common Ratio Effect regarded as classic examples of the violation of the Expected Utility Theory Axioms – may be easily explained by assuming that changes in wealth (i.e. gains and losses) are perceived in relative terms. The preference reversal observed in experiments is therefore predictable and the choices shall consequently be assumed to be rational. By contrast, the assumption that wealth changes are perceived in absolute terms leads to the conclusion that the choices violate the axioms underlying Expected Utility Theory, and are therefore irrational. This state of affairs is called the illusion of irrationality.
    Keywords: Expected Utility Theory; Relative Utility Function; Allais Paradox; Common Ratio Effect; Prospect Theory
    JEL: D81 C91 D87
    Date: 2009–12–06
  3. By: Kontek, Krzysztof
    Abstract: This short paper demonstrates that the claim of Cumulative Prospect Theory (CPT) that people are risk seeking for loss prospects, which confirmed a hypothetical assumption of the earlier Prospect Theory (PT), appears to be merely a result of using a specific form of the probability weighting function to estimate the power factor of the value function. Using experimental data and the form of the probability weighting function presented by CPT gives a power factor for losses of less than 1. This would mean that people are risk seeking for loss prospects. However, once more flexible, two-parameter forms are used, the power factor takes on values between 1.04 and 1.10. This, however, makes the value function convex, which indicates risk aversion. It follows that people are generally risk averse both for gains and for losses. This contradicts one of the main theses of Prospect Theory.
    Keywords: Prospect Theory; Value Function; Probability Weighting Function; Risk Attitude
    JEL: D81 C91 D87
    Date: 2009–12–14
  4. By: Martin L. Weitzman
    Abstract: It is widely recognized that the economics of distant-future events, like climate change, is critically dependent upon the choice of a discount rate. Unfortunately, it is unclear how to discount distant-future events when the future discount rate itself is unknown. In previous work, an analytically-tractable approach called "gamma discounting" was proposed, which gave a declining discount rate schedule as a simple closed-form function of time. This paper extends the previous gamma approach by using a Ramsey optimal growth model, combined with uncertainty about future productivity, in order to "risk adjust" all probabilities by marginal utility weights. Some basic numerical examples are given, which suggest that the overall effect of risk-adjusted gamma discounting on lowering distant-future discount rates may be significant. The driving force is a "fear factor" from risk aversion to permanent productivity shocks representing catastrophic future states of the world.
    JEL: Q54
    Date: 2009–12
  5. By: Zibell, Laurent; Allen, Peter M.
    Abstract: This article considers cognitive distance and combined competence as predictors of concrete outcomes in co-operative Research and Development projects. The operationalisation is based upon a dedicated survey, answered by matched pairs of projects managers in partnering organisations, addressing technical and scientific competence, R&D management competence and cultural features. Empirical validation was performed on 92 projects based in France, Germany and the United Kingdom in the industry of electronics and telecommunications equipment. Selected dimensions of the cognitive distance and of combined competence being developed appear to be better predictors of concrete project outcomes than geographic distance, differences in organisation size or in legal status. --
    Keywords: Cognitive distance,Competence,Capability,Cooperation,R&D
    JEL: M14 L24 L25 O31 O32
    Date: 2009

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