nep-neu New Economics Papers
on Neuroeconomics
Issue of 2020‒05‒04
four papers chosen by

  1. Stochastic representation decision theory: How probabilities and values are entangled dual characteristics in cognitive processes By Giuseppe Ferro; Didier Sornette
  2. Locus of Control, Saving and Propensity to Save By Alessandro Bucciol; Serena Trucchi
  3. Small business owners as gatekeepers of knowledge? Personality traits & modes of innovation By Runst, Petrik; Thomä, Jörg
  4. Can Early Intervention have a Sustained Effect on Human Capital? By Orla Doyle

  1. By: Giuseppe Ferro (ETH Zürich - Department of Management, Technology, and Economics (D-MTEC)); Didier Sornette (ETH Zürich - Department of Management, Technology, and Economics (D-MTEC); Swiss Finance Institute)
    Abstract: Humans are notoriously bad at understanding probabilities, exhibiting a host of biases and distortions that are context dependent. This has serious consequences on how we assess risks and make decisions. Several theories have been developed to replace the normative rational expectation theory at the foundation of economics. These approaches essentially assume that (subjective) probabilities weight multiplicatively the utilities of the alternatives offered to the decision maker, although evidence suggest that probability weights and utilities are often not separable in the mind of the decision maker. In this context, we introduce a simple and efficient framework on how to describe the inherently probabilistic human decision-making process, based on a representation of the deliberation activity leading to a choice through stochastic processes, the simplest of which is a random walk. Our model leads naturally to the hypothesis that probabilities and utilities are entangled dual characteristics of the real human decision making process. It derives two previously postulated features of prospect theory (Kahneman and Tversky, 1979): the inverse S-shaped subjective probability as a function of the objective probability and risk-seeking behaviour in the loss domain. It also predicts observed violations of stochastic dominance (Birnbaum and Navarrete, 1998) while it does not when the dominance is “evident”. Our theory, which offers many more predictions for future tests, has strong implications for psychology, economics and artificial intelligence.
    Keywords: stochastic decision theory, duality of probability and value, subjective probability, risk-seeking behaviour, stochastic dominance
    JEL: A12 C44 D81
    Date: 2020–04
  2. By: Alessandro Bucciol (Department of Economics (University of Verona)); Serena Trucchi (Cardiff University)
    Abstract: We study the relationship between (internal and external) locus of control and saving choices using data from a longitudinal household survey representative of the Dutch population. Our findings show that individuals with more internal locus of control and less external locus of control save more, both at the extensive (probability to save) and intensive margins (amount of saving). We also investigate the mechanisms behind the relationship, assessing the role of propensity to save as a mediator. This way the effects on saving of internal and external locus can be split in direct and indirect components; the latter, which is found to be significant although less sizeable than the direct component, means that locus of control has an impact on the propensity to save which, in turn, affects saving.
    Keywords: Locus of Control, Saving decisions, Propensity to Save, Mediation analysis.
    JEL: D14 D91
    Date: 2020–04
  3. By: Runst, Petrik; Thomä, Jörg
    Abstract: Previous research has established that certain personality traits represent predictors of start-up activity. We argue that similar cognitive processes that affect entrepreneurship also play a role in firm-level innovativeness. For example, open-ness to novelty can be regarded as a key component of entrepreneurial alertness in terms of both business creation and the generation of innovations within existing businesses. Based on a large survey of less R&D-intensive SMEs from Germany, we show that certain Big Five personality traits as well as certain personality prototypes of business owners are positively related to innovation activity. More importantly, this relationship depends on the mode of innovation, where companies operating under the DUI mode (Doing-Using-Interacting) seem to benefit in particular from certain owners' personality characteristics. In addition, we present evidence that complementarities between entrepreneurs' personality traits exist in terms of self-selection into the DUI mode. To explain our findings, we argue that the personali-ty characteristics of small business owners affect whether or not absorptive capacity can mediate between external knowledge and firm-level innovativeness.
    Keywords: Innovation,Modes of innovation,Absorptive capacity,Personality Traits,Big Five,SMEs
    JEL: L26 O31 O33
    Date: 2020
  4. By: Orla Doyle (School of Economics & Geary Institute for Public Policy, University College Dublin)
    Abstract: Evidence on the sustained effect of early intervention is inconclusive, with many studies experiencing a dissolution of treatment effects once the program ends. Using a randomized trial, this paper examines the impact of Preparing for Life (PFL), a pregnancy to age five home visiting and parenting program, on outcomes in middle childhood. We find little evidence of cognitive fade-out at age nine, with significant treatment effects on cognitive skills (0.67SD) and school achievement tests (0.47-0.74SD) that are of a similar magnitude to those observed at the end of the program. There is no impact on other school outcomes and earlier effects for socio-emotional skills are no longer evident. While about 50 percent of the sample is retained at age nine, the treatment groups are still balanced on all key baseline characteristics and the results are robust to inverse probability weighting. Mediation analysis suggests that ~46 percent of the treatment effect on cognitive skills is explained by improvements in early parental investment. This study demonstrates that boosting children’s early cognitive skills can reduce school-age inequalities five years after program completion, yet continued investment may be needed to break long-standing inequalities in other dimensions of skills.
    Keywords: Early childhood intervention; cognitive skills; socio-emotional and behavioral skills; randomized control trial; school-age inequalities.
    JEL: C93 D13 I26 J13
    Date: 2020–04–20

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