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on Cognitive and Behavioural Economics |
| By: | Christoph March (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Sebastian Krügel (Max Planck Institute of Economics - Max Planck Institute of Economics); Anthony Ziegelmeyer (Max Planck Institute of Economics - Max Planck Institute of Economics) |
| Abstract: | We investigate whether experimental participants follow their private information and contradict herds in situations where it is empirically optimal to do so. We consider two sequences of players, an observed and an unobserved sequence. Observed players sequentially predict which of two options has been randomly chosen with the help of a medium quality private signal. Unobserved players predict which of the two options has been randomly chosen knowing previous choices of observed and with the help of a low, medium or high quality signal. We use preprogrammed computers as observed players in half the experimental sessions. Our new evidence suggests that participants are prone to a 'social-confirmation' bias and it gives support to the argument that they naively believe that each observable choice reveals a substantial amount of that person's private information. Though both the 'overweighting-of-private-information' and the 'social-con firmation' bias coexist in our data, participants forgo much larger parts of earnings when herding naively than when relying too much on their private information. Unobserved participants make the empirically optimal choice in 77 and 84 percent of the cases in the human-human and computer-human treatment which suggests that social learning improves in the presence of lower behavioral uncertainty. |
| Keywords: | Information cascades ; Laboratory Experiments ; Naive herding |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00671378&r=cbe |
| By: | Stefanie Peer (VU University Amsterdam); Erik Verhoef (VU University Amsterdam); Jasper Knockaert (VU University Amsterdam); Paul Koster (VU University Amsterdam); Yin-Yen Tseng (VU University Amsterdam) |
| Abstract: | Theoretical and empirical studies of consumer scheduling behavior usually ignore that consumers have more flexibility to adjust their schedule in the long run than in the short run. We are able to distinguish between long-run choices of travel routines and short-run choices of departure times due to an extensive panel dataset of commuters who participate in a real-life peak avoidance experiment. We find that the participants, who obtain a monetary reward for not traveling along a camera-observed highway link during the morning peak, value travel time higher in the long-run context compared to the short run, as changes in travel time are more permanent and can be exploited better through the adjustment of routines. Schedule delays are, in contrast, valued higher in the short-run model, reflecting that scheduling restrictions are typically more binding in the short run. Since the short-run and the long-run shadow prices dier by factors ranging from 2 to 5 in our basic model, our results may have substantial impacts on optimal choices for transport policies such as pricing and investment. |
| Keywords: | scheduling model; travel routines; departure time choices; long-run vs. short-run; information; travel time expectations; revealed preference data; reward experiment |
| JEL: | C25 D03 D80 R48 |
| Date: | 2011–12–22 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20110181&r=cbe |
| By: | Pouget, Sébastien; Villeneuve, Stéphane |
| Abstract: | This paper proposes a dynamic model of financial markets where some investors are prone to the confirmation bias. Following insights from the psychological literature, these agents are assumed to amplify signals that are consistent with their prior views. In a model with public information only, this assumption provides a rationale for the volume-based price momentum documented by Lee and Swaminathan (2000). Our results are also consistent with a variety of other empirically documented phenomena such as bubbles, crashes, reversals and excess price volatility and volume. Novel empirical predictions are derived: i) return continuation should be stronger when biased traders' beliefs are more extreme, and ii) return continuation should be stronger after an increase in trading volume. The implications of our model for short-term quantitative investments are twofold: i) optimal trading strategies involve riding bubbles, and that ii) contrarian trading can be optimal in some market circumstances. |
| Keywords: | financial markets, psychological biases, confirmation bias, momentum, reversal, bubbles, trading strategies |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:25823&r=cbe |
| By: | Powdthavee, Nattavudh (London School of Economics); Riyanto, Yohanes E. (Nanyang Technological University, Singapore) |
| Abstract: | We investigated experimentally whether people can be induced to believe in a non-existent expert, and subsequently pay for what can only be described as transparently useless advice about future chance events. Consistent with the theoretical predictions made by Rabin (2002) and Rabin and Vayanos (2010), we show empirically that the answer is yes and that the size of the error made systematically by people is large. |
| Keywords: | gambler's fallacy, hot-hand, random streak, expertise, information |
| JEL: | C91 D03 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp6557&r=cbe |
| By: | Laibson, David I.; Madrian, Brigitte; Beshears, John; Choi, James J. |
| Abstract: | We describe the pension plan features of the states and the largest cities and counties in the U.S. Unlike in the private sector, defined benefit (DB) pensions are still the norm in the public sector. However, a few jurisdictions have shifted towards defined contribution (DC) plans as their primary savings plan, and fiscal pressures are likely to generate more movement in this direction. Holding fixed a public employee‘s work and salary history, we show that DB retirement income replacement ratios vary greatly across jurisdictions. This creates large variation in workers‘ need to save for retirement in other accounts. There is also substantial heterogeneity across jurisdictions in the savings generated in primary DC plans because of differences in the level of mandatory employer and employee contributions. One notable difference between public and private sector DC plans is that public sector primary DC plans are characterized by required employee or employer contributions (or both), whereas private sector plans largely feature voluntary employee contributions that are supplemented by an employer match. We conclude by applying lessons from savings behavior in private sector savings plans to the design of public sector plans. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:hrv:hksfac:4723207&r=cbe |
| By: | Trautmann, Stefan T; Zeckhauser, Richard Jay |
| Abstract: | Financial, managerial, and medical decisions often involve alternatives whose possible outcomes have uncertain probabilities. In contrast to alternatives whose probabilities are known, these uncertain alternatives offer the benefits of learning. In repeat-choice situations, such learning brings value. If probabilities appear favorable (unfavorable), a choice can be repeated (avoided). In a series of experiments involving bets on the colors of poker chips drawn from bags, decision makers often prove to be blind to the learning opportunities offered by uncertain probabilities. Such decision makers violate rational decision making and forgo significant expected payoffs when they shun uncertain alternatives in favor of risky ones. Worse, when information is revealed, many make choices contrary to learning. A range of factors explain these violations. The results indicate that priming with optimal strategies offers little improvement. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:hrv:hksfac:5347068&r=cbe |
| By: | Angelova, Vera; Attanasi, Giuseppe; Hiriart, Yolande |
| Abstract: | We compare the performance of liability rules for managing environmental disasters when third parties are harmed and cannot always be compensated. A firm can invest in safety to reduce the likelihood of accidents. The firm’s investment is unobservable to authorities. Externality and asymmetric information call for public intervention to define rules aimed at increasing prevention. We determine the investment in safety under No Liability, Strict Liability and Negligence, and compare it to the first best. Additionally, we investigate how the (dis)ability of the firm to fully cover potential damages affects the firm’s behavior. An experiment tests the theoretical predictions. In line with theory, Strict Liability and Negligence are equally effective; both perform better than No Liability; investment in safety is not sensitive to the ability of the firm to compensate potential victims. In contrast with theory, prevention rates absent liability are much higher and liability is much less effective than predicted. |
| Keywords: | Risk Regulation, Liability Rules, Incentives, Insolvency, Experiment. |
| JEL: | D82 K13 K32 Q58 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:25820&r=cbe |
| By: | Joachim Weimann (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Jeannette Brosig-Koch; Heike Hennig-Schmidt; Claudia Keser; Christian Stahr (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg) |
| Abstract: | Many of real-world public-goods are characterized by a marginal per capita return (MPCR) close to zero and have to be provided by large groups. Up until now, there is almost no evidence on how large groups facing a low MPCR behave in controlled public-good laboratory experiments involving financial incentives. Connecting four experimental laboratories located in four di¤erent German universities via Internet, we are able to run such experiments. In ad-dition to the group size (60 and 100 subjects), we vary the MPCR which is as small as 0:02 or 0:04. Our data reveal a strong MPCR effect, but almost no group-size e¤ect. Our data demonstrates that, even in large groups and for low MPCRs, considerable contributions to public goods can be expected. Interestingly, the contribution patterns observed in large and very small groups are very similar. To the best of our knowledge, this study is the first one that includes large-group laboratory experiments with a small MPCR under conditions comparable to previous small-group standard public-good experiments. |
| JEL: | C91 C72 H42 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:mag:wpaper:120009&r=cbe |
| By: | Grégory Ponthière (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris) |
| Abstract: | The public provision of long-term care (LTC) can replace family-provided LTC when adults are not sufficiently altruistic towards their elderly parents. But State intervention can also modify the transmission of values and reduce the long-run prevalence of family altruism in the population. That evolutionary effect questions the desirability of the LTC public provision. To characterize the optimal LTC policy, we develop a three-period OLG model where the population is divided into altruistic and non-altruistic agents, and where the transmission of (non) altruism takes place through a socialization process à la Bisin and Verdier (2001). The optimal short-run and long-run LTC policies are shown to differ, to an extent varying with the particular socialization mechanism at work. |
| Keywords: | long-term care ; altruism ; socialization ; optimal policy ; crowding out effect |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00622385&r=cbe |