nep-neu New Economics Papers
on Neuroeconomics
Issue of 2010‒10‒16
eight papers chosen by
Daniel Houser
George Mason University

  1. The neural basis of bounded rational behavior By Giorgio Coricelli; Rosemarie Nagel
  2. A Cognitive Hierarchy Model of Behavior in Endogenous Timing Games By Daniel Carvalho; Luis Santos-Pinto
  3. Stepwise Thinking in Strategic Games with Incomplete Information By Carsten S. Nielsen
  4. Strategic Interaction and Conventions By María Paz Espinosa; Jaromír Kovárík; Giovanni Ponti
  5. Labor Market Signaling with Overconfident Workers By Luis Santos-Pinto
  6. Self-Esteem, Shame and Personal Motivation By Dessi, Roberta; Zhao, Xiaojian
  7. Field and Online Experiments on Procrastination and Willpower By Nicholas Burger; Gary Charness
  8. The Easterlin Paradox and Another Anatomy of Income Comparisons: Evidence from Hypothetical Choice Experiments By Katsunori Yamada; Masayuki Sato

  1. By: Giorgio Coricelli (University of Southern California and Centre of Cognitive Neuroscience, Bron (Lyon), France.); Rosemarie Nagel (Universitat Pomepu Fabra)
    Abstract: Bounded rational behaviour is commonly observed in experimental games and in real life situations. Neuroeconomics can help to understand the mental processing underlying bounded rationality and out-of-equilibrium behaviour. Here we report results from recent studies on the neural basis of limited steps of reasoning in a competitive setting – the beauty contest game. We use functional magnetic resonance imaging (fMRI) to study the neural correlates of human mental processes in strategic games. We apply a cognitive hierarchy model to classify subject’s choices in the experimental game according to the degree of strategic reasoning so that we can identify the neural substrates of different levels of strategizing. We found a correlation between levels of strategic reasoning and activity in a neural network related to mentalizing, i.e. the ability to think about other’s thoughts and mental states. Moreover, brain data showed how complex cognitive processes subserve the higher level of reasoning about others. We describe how a cognitive hierarchy model fits both behavioural and brain data.
    Keywords: Game theory, Bounded rationality, Neuroeconomics
    Date: 2010–10–01
  2. By: Daniel Carvalho; Luis Santos-Pinto
    Abstract: This paper applies the cognitive hierarchy model of Camerer, Ho and Chong (2004) to the action commitment game of Hamilton and Slutsky (1990). The model generates the heterogeneity of behavior reported in Huck, Müeller and Normann (2002). The model predicts the spike in the leadership quantity in the first period as well as the spike in the Cournot quantity in the second period. The model predicts delay, a feature that cannot be explained by social preferences. The also model predicts very well the percentage of Stackelberg outcomes, double leadership outcomes, and Stackelberg leaders punished by followers. Notwithstanding, the model produces low first period movement and is unable to generate sufficient percentages of sequential play of Cournot quantities and collusive market outcomes.
    Keywords: endogenous timing games; thinking steps; cognitive hierarchy
    JEL: C72 D43 L13
    Date: 2010–01
  3. By: Carsten S. Nielsen (Department of Economics, University of Copenhagen)
    Abstract: This paper proposes a general incomplete information framework for studying behavior in strategic games with stepwise (viz. `level-k' or `cognitive hierarchy') thinking, which has been found to describe strategic behavior well in experiments involving players' initial responses to games. It is shown that there exist coherent stepwise beliefs, implied by step types, that have the potential to encode all relevant information. In the structure of stepwise beliefs, players are unaware of opponents doing at least as much thinking as themselves. As a result, there exists a Bayesian Nash equilibrium strategy profile in which any player at some step fixes the best responses of opponents at lower steps and then best responds herself.
    Keywords: game theory; interactive epistemology; unawareness; Bayesian Nash equilibrium; bounded rationality; level-k; cognitive hierarchy
    JEL: C70 C72 D80 D82
    Date: 2010–07
  4. 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 to review 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
    Date: 2010–10–01
  5. By: Luis Santos-Pinto
    Abstract: I extend Spence's (1974) labor market signaling model by assuming some workers are overconfident and some underconfident. Overconfident (underconfident) workers underestimate (overestimate) their marginal cost of acquiring education. Firms cannot observe workers' productive abilities and cannot observe workers' beliefs. However, firms know the fraction of overconfident, underconfident, and high-ability workers in the economy. I find that the presence of overconfident and/or underconfident workers in the labor market compresses wages. I show that workers' biased beliefs reduce welfare when workers are sufficiently different in terms of productivity and cost of education. Finally, I show that if the fraction of overconfident workers is relatively low and workers are sufficiently similar in terms of productivity and cost of education, then biased beliefs improve welfare.
    Keywords: signaling; labor market; behavioral biases; wages; education
    JEL: D82 J24 J31
    Date: 2010–06
  6. By: Dessi, Roberta (Toulouse School of Economics (GREMAQ and IDEI) and CEPR); Zhao, Xiaojian (Hong Kong University)
    Abstract: The available evidence from numerous studies in psychology suggests that overconfidence is a much more important phenomenon in North America than in Japan. Relatedly, North Americans appear to view high self-esteem much more positively than Japanese. The pattern is reversed when it comes to shame, a social emotion which appears to play a much more important role among Japanese than North Americans. We develop an economic model that endogenizes these observed differences, and relates them to differences in economic opportunities. A crucial tradeoff arises in the model between the benefits of encouraging self-improvement and the benefits of promoting initiative and new investments. In this context, self-esteem maintenance (self-enhancement) and high sensitivity to shame emerge as substitute mechanisms to induce efficient effort and investment decisions, generating a "North American" equilibrium with overconfidence and low sensitivity to shame, and a "Japanese" equilibrium with high sensitivity to shame and no overconfidence. The analysis identifies the key equilibrium costs as well as the benefits of reliance on each mechanism, and the implications for welfare.
    JEL: D82 D83 Z13
    Date: 2010–09–15
  7. By: Nicholas Burger (Rand Corporation); Gary Charness (University of California at Santa Barbara, Econonmics Department)
    Abstract: Self-control problems have recently received considerable attention from economic theorists. We conducted two studies to test the benefits of externally imposed deadlines and how willpower depletion affects behavior, providing some of the first data in these areas. Each study involved a behavioral intervention designed to affect performance. We find that for a lengthy task, regular deadlines neither reduce procrastination nor increase completion rates. Second, a willpower-depleting task reduces initial effort but increases overall task-completion rates. Our results help to inform ongoing efforts to understand and model procrastination, willpower and commitment mechanisms.
    Keywords: Experiment, Behavioral Interventions, Procrastination, Willpower
    JEL: A13 B49 C91 C93 D00
    Date: 2010–05–18
  8. By: Katsunori Yamada; Masayuki Sato
    Abstract: This paper provides evidence from Internet-based, large-scale survey data of hypothetical choice experiment on the relative utility hypothesis. The methodology exploited here complements previous empirical results from happiness studies, incentivized choice experiment studies, and neuroscience studies in sucha way that methodological problems among previous studies within these fields are resolved. We show that not only the intensity but also the distribution of relative utility are different across specific comparison benchmarks (internal reference group), and across types of reference groups people are facing in the experiments (external reference group). The relative utility effect among Japanese respondents, while shown to exist in the form of jealousy, is found to be not as strong as can validate the Easterlin paradox. Comparison benchmark with daily contacts is related to stronger jealousy. We also provide empirical evidence, which nuances that the reference group is chosen endogenously.
    Date: 2010–09

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