New Economics Papers
on Neuroeconomics
Issue of 2014‒01‒17
two papers chosen by

  1. Cognitive Ability, Expectations, and Beliefs about the Future: Psychological Influences on Retirement Decisions By Andrew M. Parker; Leandro S. Carvalho; Susann Rohwedder
  2. Welfare Improving Discrimination based on Cognitive Limitations By Oktay Sürücü

  1. By: Andrew M. Parker (RAND); Leandro S. Carvalho (RAND); Susann Rohwedder (RAND)
    Abstract: Recent advances in behavioral decision research, behavioral economics, and life-span development psychology provide leverage for expanding our understanding of the decision to retire earlier versus later. This report examines how cognitive abilities, perceptions about the future, and other psychological characteristics affect retirement decisions. We use existing and new data collected through the RAND-USC American Life Panel, including detailed assessments of fluid and crystallized intelligence, financial literacy, expectations for the future, future time perspective, and maximizing versus satisficing decision styles. We find those with high levels of cognitive ability are more likely to retire later, as are those with greater longevity expectations. We also find those with lower cognitive ability have less coherent expectations of retirement—suggesting a need for planning assistance. We also find expectation of lower Social Security benefits is associated with plans to retire later—contrary to our hypothesis that such expectation might spur early retirement in an effort to lock in benefits. Finally, we find that tendencies maximize (versus satisfice) had mixed effects on retirement decision making, with different aspects of maximizing tendencies showing different relationships with retirement decision making. Future work should expand these data in a targeted direction. Recent research notes that decision-making competence can be improved with training, and to the extent this trainability extends to older adults, decision skills may be a useful target for intervention. Stronger longitudinal design and analysis can also help demonstrate possible endogenities between retirement and psychological variables.
    Date: 2013–09
  2. By: Oktay Sürücü (Center for Mathematical Economics, Bielefeld University)
    Abstract: This paper is concerned with the situation in which a profit-maximizing monopolist faces consumers that are diverse not only in their preferences but also in their levels of bounded rationality. The behavioral phenomenon considered here is the attraction effects when choices are made across categories. Using the standard second-degree price discrimination model, the optimal menu of contracts that screens consumers' types is characterized. The benefit of discriminating consumers based on their preference and cognitive limitation is always higher than its cost. In other words, the monopolist can exploit consumers and increase his profit with this contract. The model provides a possible explanation for the apparent puzzle why one may observe that the same quality products are priced differently under different labels. Moreover, this contract is welfare improving.
    Keywords: bounded rationality, attraction effect, contract design, welfare
    JEL: D03 D42 D60 D82 D86
    Date: 2013–12

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