New Economics Papers
on Neuroeconomics
Issue of 2010‒07‒24
three papers chosen by

  1. Investing in Our Young People By Cunha, Flavio; Heckman, James J.
  2. Probability Weighting as Evolutionary Second-best By Florian Herold; Nick Netzer
  3. Strategic Interaction and Conventions. By María Paz Espinosa; Jaromír Kovárík; Giovanni Ponti

  1. By: Cunha, Flavio (University of Pennsylvania); Heckman, James J. (University of Chicago)
    Abstract: This paper reviews the recent literature on the production of skills of young persons. The literature features the multiplicity of skills that explain success in a variety of life outcomes. Noncognitive skills play a fundamental role in successful lives. The dynamics of skill formation reveal the interplay of cognitive and noncognitive skills, and the presence of critical and sensitive periods in the life-cycle. We discuss the optimal timing of investment over the life-cycle.
    Keywords: skill formation, cognitive skills, noncognitive skills, technology of skill formation, investment in children
    JEL: J13 J24 D91
    Date: 2010–07
  2. By: Florian Herold (Kellogg School of Management, Northwestern University); Nick Netzer (Socioeconomic Institute, University of Zurich)
    Abstract: The economic concept of the second-best involves the idea that multiple simultaneous deviations from a hypothetical first-best optimum may be optimal once the first-best itself can no longer be achieved, since one distortion may partially compensate for another. Within an evolutionary framework, we translate this concept to behavior under uncertainty. We argue that the two main components of prospect theory, the value function and the probability weighting function, are complements in the second-best sense. Previous work has shown that an adaptive S-shaped value function may be evolutionary optimal if decision-making is subject to cognitive or perceptive constraints. We show that distortions in the way probabilities are perceived can further enhance fitness. The second-best optimum involves overweighting of small and underweighting of large probabilities. Behavior as described by prospect theory might therefore be evolution’s second-best solution to the fitness maximization problem. Our model makes empirically testable predictions about the relation between individuals’ value and probability weighting functions.
    Keywords: Probability Weighting, Prospect Theory, Evolution of Preferences
    JEL: D01 D81
    Date: 2010–07
  3. By: María Paz Espinosa (Universidad del País Vasco); Jaromír Kovárík (Universidad del País Vasco); Giovanni Ponti (Universidad de Alicante and Università di Ferrara)
    Abstract: The scope of the paper is the literature that employs coordination games to study social norms and conventions from the viewpoint of game theory and cognitive psychology. We claim that those two alternative approaches are complementary, as they provide different insights to explain how people converge to a unique system of self-fulfilling expectations in presence of multiple, equally viable, conventions. While game theory explains the emergence of conventions relying on efficiency and risk considerations, the psychological view is more concerned with frame and labeling effects. The interaction between these alternative (and, sometimes, competing) effects leads to the result that coordination failures may well occur and, even when coordination takes place, there is no guarantee that the convention eventually established will be the most efficient.
    Keywords: Behavioral Game Theory, conventions, social norms
    JEL: C72
    Date: 2010–07–12

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