New Economics Papers
on Neuroeconomics
Issue of 2010‒10‒23
six papers chosen by

  1. The Framing of Games and the Psychology of Play By Martin Dufwenberg; Simon Gaechter; Heike Hennig-Schmidt
  2. Explaining the socio-economic gradient in child outcomes: the intergenerational transmission of cognitive skills By Claire Crawford; Alissa Goodman; Robert Joyce
  3. Consumer Ethics: The Role of Self-Regulatory Focus By T. DE BOCK; P. VAN KENHOVE
  4. Gains and losses in intertemporal preferences: a behavioural study By Valeria Faralla; Francesca Benuzzi; Paolo Nichelli; Nicola Dimitri
  5. Are smarter people really less risk averse? By Sergio Sousa
  6. Overconfidence and risk dispersion By Heller, Yuval

  1. By: Martin Dufwenberg (University of Arizona); Simon Gaechter (University of Nottingham); Heike Hennig-Schmidt (University of Bonn)
    Abstract: Psychological game theory can provide rational-choice-based framing effects; frames influence beliefs, beliefs influence motivations. We explain this theoretically and explore empirical relevance experimentally. In a 2?2 design of one-shot public good games we show that frames affect subject’s first- and second-order beliefs, and contributions. From a psychological gametheoretic framework we derive two mutually compatible hypotheses about guilt aversion and reciprocity under which contributions are related to second- and first-order beliefs, respectively. Our results are consistent with either.
    Keywords: framing; psychological game theory; guilt aversion; reciprocity; public good games; voluntary cooperation
    JEL: C91 C72 D64 Z13
    Date: 2010–09
  2. By: Claire Crawford (Institute for Fiscal Studies); Alissa Goodman (Institute for Fiscal Studies); Robert Joyce (Institute for Fiscal Studies)
    Abstract: <p><p><p>Papers in this volume and elsewhere consistently find a strong relationship between children's cognitive abilities and their parents' socio-economic position (SEP). Most studies seeking to explain the paths through which SEP affects cognitive skills suffer from a potentially serious omitted variables problem, as they are unable to account for an important determinant of children's cognitive abilities, namely parental cognitive ability. A range of econometric strategies have been employed to overcome this issue, but in this paper, we adopt the very simple (but rarely available) route of using data that includes a range of typically unobserved characteristics, such as parental cognitive ability and social skills. In line with previous work on the intergenerational transmission of cognitive skills, we find that parental cognitive ability is a significant predictor of children's cognitive ability; moreover, it explains one sixth of the socio-economic gap in those skills, even after controlling for a rich set of demographic, attitudinal and behavioural factors. Despite the importance of parental cognitive ability in explaining children's cognitive ability, however, the addition of such typically unobserved characteristics does not alter our impression of the relative importance of other factors in explaining the socio-economic gap in cognitive skills. This is reassuring for studies that are unable to control for parental cognitive ability.</p></p></p>
    Date: 2010–09
    Abstract: The present study investigates the influence of self-regulatory focus on consumer ethical beliefs (i.e., consumers’ judgment of various unethical consumer practices). The self-regulatory focus framework is highly influential and applies to an impressively wide spectrum of topics across a diverse array of domains. However, previous research has not yet examined the link between this personality construct and the consumer ethics field. Findings indicate that promotion affects one’s attitude toward questionable consumer practices with those having a stronger (versus weaker) promotion focus being more likely to believe these consumer misbehaviors to be acceptable. Further, this study shows that prevention influences one’s perception of morally dubious consumer practices with those having a stronger (versus weaker) prevention focus being more inclined to believe these questionable consumer activities to be unacceptable.
    Keywords: demography consumer ethical beliefs, consumer ethics, consumer ethics scale, personal characteristics, self-regulatory focus
    Date: 2010–09
  4. By: Valeria Faralla; Francesca Benuzzi; Paolo Nichelli; Nicola Dimitri
    Abstract: According to recent evidence (Frederick, Loewenstein, & O’Donoghue, 2002), the traditional Discounted Utility model (Samuelson, 1937) has a limited ability to describe realistic models of behaviour and indeed there are several documented empirical regularities that seem to contradict this statement both in certainty and uncertainty conditions. This study focused on one of the best documented anomalies: sign effect or gain-loss asymmetry (Frederick et al., 2002; Loewenstein & Prelec, 1992; Read, 2004). Specifically, the study investigated the intertemporal preference for symmetric monetary rewards and punishments in certain conditions, and the no wealth effects hypothesis (Dimitri, 2007) by asking subjects to choose between two positive or two negative euro amounts available at different points in time. The experimental design applied here followed the same behavioural pattern of the neuroeconomics’ study on monetary rewards realized by McClure et al. (2004). The results confirmed a gain-loss asymmetry at least for medium and large euro amount and suggested new directions of research.
    Keywords: intertemporal preferences; gains; losses; certainty; sign effect .
    JEL: D90 D91
    Date: 2010–06
  5. By: Sergio Sousa (University of Nottingham)
    Abstract: Using hypothetical lottery choices to measure risk preferences, Frederick (2005) finds that higher cognitive ability is associated with less risk aversion. This paper documents, however, that when using an incentive compatible measure of risk preference, attitudes towards risk are not associated to cognitive ability as measured by Frederick’s (2005) three-item cognitive reflection test. This is a new finding that adds weight to the claim that lack of proper financial incentives can sometimes be a source of bias. In addition, we show that this lack of association between risk preferences and cognitive ability is robust to using a broader measure of cognitive ability that takes into account both verbal and non-verbal reasoning skills. Our results suggest the possibility that whether cognitive ability relates to attitudes towards risk is sensitive to instruments used to measure both of them.
    Keywords: cognitive ability, risk preferences, financial incentives, cognitive reflection test
    JEL: C91 D01 D80 D00
    Date: 2010–10
  6. By: Heller, Yuval
    Abstract: Experimental evidence suggests that people tend to be overconfident in the sense that they overestimate the accuracy of their own predictions. In this paper we present a simple principal-agent model in which principal's interest in dispersing risk motivates him to hire overconfident agents. We show that the induced overconfidence satisfies experimental stylized facts (such as, hard-easy effect, false certainty effect and underuse of base rates). In addition, we show that overconfidence is a unique stable evolutionary strategy, and that it can Pareto-improve social welfare. Finally, we demonstrate applicability by: 1) demonstrating why CEOs hire overconfident intermediate managers, and 2) explaining why investors prefer overconfident entrepreneurs.
    Keywords: overconfidence; risk dispersion; hard-easy effect; evolutionary stability
    JEL: C72 C73
    Date: 2010–09–26

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