New Economics Papers
on Neuroeconomics
Issue of 2010‒11‒27
five papers chosen by

  1. Term structure of psychological interest rates: A behavioral test By Hubert De La Bruslerie
  2. An Unlucky Feeling: Overconfidence and Noisy Feedback By Grossman, Zachary; Owens, David
  3. Overconfidence by Bayesian Rational Agents By Eric Van den Steen
  4. Overconfidence Can Improve an Agent's Relative and Absolute Performance in Contests By Ludwig, Sandra; Wichardt, Philipp C.; Wickhorst, Hanke
  5. Trust, Confidence and Economic Growth An Evaluation of the Beugelsdijk Hypothesis By Benjamin Volland

  1. By: Hubert De La Bruslerie (DRM - Dauphine Recherches en Management - CNRS : UMR7088 - Université Paris Dauphine - Paris IX)
    Abstract: A lot of empirical and behavioral studies underline the idea of a non-flat term structure of subjective interest rates with a decreasing slope. Using an empirical test, this paper aims at identifying in individual behaviors whether agents see their psychological value of time decreasing or not. We show that the subjective interest rate follows a negatively sloped term structure. It can be parameterized using two variables, one specifying the instantaneous time preference, the other characterizing the slope of the term structure. A trade-off law called “balancing pressure law” is identified between these two parameters. We show that the term structure of psychological rates depends strongly on gender, but appears not to be linked with life expectancy. We also question the cross relationship between risk aversion and time preference. From a theoretical point of view, these two variables stand as two different and independent dimensions of choice. However, empirically, both time preference attitude and slope seem directly influenced by risk attitude.
    Keywords: hyperbolic discounting, time preference, behavioral economics, psychological time value, risk aversion
    Date: 2011–11
  2. By: Grossman, Zachary; Owens, David
    Abstract: How does overconfidence arise and how does it persist in the face of experience and feedback? In an experimental setting, we examine how individuals’ beliefs about their own performance on a quiz react to noisy, but unbiased feedback. In a control treatment, each participant expresses her beliefs about another participant’s performance, rather than her own. On average, they express accurate posteriors about others’ scores, but they overestimate their own score, believing themselves to have received ‘unlucky’ feedback. However, this driven by overconfident priors, as opposed to biased information processing. We also find that, while feedback improves estimates about the performance on which it is based, this learning does not translate into improved estimates of related performances. This suggests that people use performance feedback to update their beliefs about their ability differently than they do to update their beliefs about their performance, which may contribute to the persistence of overconfidence.
    Keywords: overconfidence, overestimation, learning, Bayes rule, biased updating, learning transfer, experiments, quadratic scoring rule
    Date: 2010–11–11
  3. By: Eric Van den Steen (Harvard Business School, Strategy Unit)
    Abstract: This paper derives two mechanisms through which Bayesian-rational individuals with differing priors will tend to be relatively overconfident about their estimates and predictions, in the sense of overestimating the precision of these estimates. The intuition behind one mechanism is slightly ironic: in trying to update optimally, Bayesian agents overweight information of which they over-estimate the precision and underweight in the opposite case. This causes overall an over-estimation of the precision of the final estimate, which tends to increase as agents get more data.
    Date: 2010–11
  4. By: Ludwig, Sandra; Wichardt, Philipp C.; Wickhorst, Hanke
    Abstract: This paper suggests a potential rationale for the recent empirical finding that overconfident agents tend to self-select into more competitive environments (e.g. Dohmen and Falk, forthcoming). In particular, it shows that moderate overconfidence in a contest can improve the agent's performance relative to an unbiased opponent and can even lead to an advantage for the overconfident agent in absolute terms.
    Keywords: Overconfidence; Contests
    JEL: D21 D44 D82
    Date: 2010–07–05
  5. By: Benjamin Volland (Max Planck Institute of Economics, Jena, Germany)
    Abstract: This paper analyses the hypothesis that the robust relationship between trust - as measured by the World Values Survey's question "In general, do you think that most people can be trusted, or that you can't be too careful in dealing with people?" - and economic growth, established by empirical macroeconomic growth literature (Knack & Keefer, 1997; Zak & Knack, 2001; Beugelsdijk, de Groot, & van Schaik, 2004; Dearmon & Grier, 2009) in fact captures the well-functioning of institutions. Our results reveal that the correlation between trust and economic growth is robust in terms of statistical significance and sign of the estimated coefficient, when controling for the respondents' perceived well-functioning of institutions. While underlining the existing empirical evidence that trust matters in explaining differences in economic performance, our results also show that this influence is largely independent of institutional well-functioning.
    Keywords: Trust, Institutions, Economic growth
    JEL: B40 O11 Z13
    Date: 2010–11–15

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