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on Cognitive and Behavioural Economics |
| By: | Andrew E. Clark (PSE and IZA Bonn); Ed Diener (University of Illinois at Urbana-Champaign and Gallup Organization); Yannis Georgellis (Brunel University); Richard E. Lucas (Michigan State University) |
| Abstract: | We look for evidence of habituation in twenty waves of German panel data: do individuals, after life and labour market events, tend to return to some baseline level of wellbeing? Although the strongest life satisfaction effect is often at the time of the event, we find significant lag and lead effects. We conclude that there is complete adaptation to divorce, widowhood, birth of first child, and layoff. However, adaptation to marriage is only incomplete, and there is no adaptation to unemployment for men. In general, men are more affected by labour market events (unemployment and layoffs) than are women. Last, we find no consistent evidence that happiness provides insurance against hard knocks: those with high and low baseline satisfaction levels are broadly equally affected by labour market and life events. |
| Keywords: | life satisfaction, anticipation, habituation, baseline satisfaction, labour market and life events |
| JEL: | I31 J12 J13 J63 J64 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2526&r=cbe |
| By: | Armin Falk (IZA Bonn, University of Bonn and CEPR); David Huffman (IZA Bonn); Uwe Sunde (IZA Bonn, University of Bonn and CEPR) |
| Abstract: | Standard search theory assumes that individuals know, with certainty, how they compare to competing searchers in terms of ability. In contrast, we hypothesize that searchers are uncertain about relative ability, with important implications for search behavior. We test our hypotheses in a laboratory experiment. The first main finding is that people are substantially uncertain about whether they are a type with a high or low probability of success, determined by being above or below the median in terms of ability. Self-confidence, defined as an individual’s self-assessed probability of being a high type, is too high (above zero) for many low types, and too low (below 1) for many high types. Second, people update beliefs based on search outcomes. Self-confidence increases or decreases in the right direction, but is less sensitive to new information than predicted by Bayes’ rule. Third, updating affects future search decisions: people are less likely to search as confidence about being a high type falls. Fourth, some search too little, and others search too much, due to wrong beliefs. Fifth, at the end of the experiment a substantial fraction turn down the chance to learn their exact rank. These are overwhelmingly those with low ability, suggesting an aversion to learning that one is one of the worst performers. Given that people are uncertain even in the simple setting of our experiment, our evidence strongly suggests that uncertainty about ability is relevant in more complex, real-world search settings, including search for a job or search for a mate. Focusing on the case of job search, we discuss how our findings can provide a new explanation for various important stylized facts from field evidence. |
| Keywords: | search, self-confidence, discouraged workers, unemployment, gender |
| JEL: | J64 D01 D83 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2525&r=cbe |
| By: | Armin Falk (IZA, University of Bonn and CEPR); David Huffman (IZA); Uwe Sunde (IZA, University of Bonn and CEPR) |
| Abstract: | This paper presents a model of the labor market in which unemployed workers are uncertain about their relative ability to find a job. Unsuccessful search induces individuals to revise their beliefs downwards. Once self-confidence is sufficiently low, workers become discouraged and give up on search. This non-stationarity gives rise to structural flows from unemployment to non-participation in equilibrium. In contrast, existing models typically maintain stationarity and appeal to exogenous stochastic shocks to generate transitions from unemployment to non-participation. Our model is based on relaxing a single assumption in a standard matching framework - workers are uncertain about their job finding probability - and yet the model generates a variety of important implications. Our alternative assumption is supported by experimental evidence. The first implication of the model is a declining hazard from unemployment to employment, arising due to erosion of self-confidence in search. Second, because search outcomes are only a noisy signal about ability, some individuals can become overly discouraged and stop search too early due to wrong beliefs. Finally, workers with greater unemployment duration are less confident, and thus have a worse threat point in wage bargaining. Consequentially, they earn lower starting wages even if they are identical in terms of objective productivity. We discuss how the model provides a new, unifying explanation for a variety of important facts from field evidence. |
| Keywords: | learning, discouraged workers, subjective job finding probabilities |
| JEL: | E24 J60 J64 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2531&r=cbe |
| By: | Peter A. Riach (IZA Bonn (Research Fellow)); Judith Rich (University of Portsmouth and IZA Bonn) |
| Abstract: | In a field experiment of age discrimination, pairs of men aged twenty-seven and forty-seven, inquired, by email, about employment as waiters in twenty four French towns. The rate of net discrimination found against the older French waiter, corresponds to the highest rates ever recorded anywhere, by written tests, for racial discrimination. Discrimination was higher in Paris than in the rest of France. |
| Keywords: | age, discrimination, employment, field experiment, hiring |
| JEL: | J71 C93 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2522&r=cbe |