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on Cognitive and Behavioural Economics |
| By: | Sander Hoogendoorn (University of Amsterdam); Simon C. Parker (University of Western Ontario, Richard Ivey School of Business); Mirjam van Praag (University of Amsterdam) |
| Abstract: | This paper studies the impact of diversity in cognitive ability among members of a team on their performance. We conduct a large field experiment in which teams start up and manage real companies under identical circumstances. Exogenous variation in - otherwise random - team composition is imposed by assigning individuals to teams based on their measured cognitive abilities. The setting is one of business management practices in the longer run where tasks are diverse and involve complex decision-making. We propose a model in which greater ability dispersion generates greater knowledge for a team, but also increases the costs of monitoring necessitated by moral hazard. Consistent with the predictions of our model, we find that team performance as measured in terms of sales, profits and profits per share first increases, and then decreases, with ability dispersion. Teams with a moderate degree of ability dispersion also experience fewer dismissals due to few er shirking members in those teams. |
| Keywords: | Ability dispersion, team performance, field experiment, entrepreneurship, knowledge pooling, moral hazard |
| JEL: | C93 D83 J24 L25 L26 M13 M54 |
| Date: | 2012–11–29 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2012130&r=cbe |
| By: | Cars Hommes (University of Amsterdam); Mei Zhu (Shanghai University of Finance and Economics) |
| Abstract: | We propose behavioral learning equilibria as a plausible explanation of coordination of individual expectations and aggregate phenomena such as excess volatility in stock prices and high persistence in inflation. Boundedly rational agents use a simple univariate linear forecasting rule and correctly forecast the unconditional sample mean and first-order sample autocorrelation. In the long run, agents learn the best univariate linear forecasting rule, without fully recognizing the structure of the economy. The simplicity of behavioral learning equilibria makes coordination of individual expectations on such an aggregate outcome more likely. In a first application, an asset pricing model with AR(1) dividends, a unique behavioral learning equilibrium exists characterized by high persistence and excess volatility, and it is stable under learning. In a second application, the New Keynesian Phillips curve, multiple equilibria co-exist, learning exhibits path dep endence and inflation may switch between low and high persistence regimes. |
| Keywords: | Bounded rationality; Stochastic consistent expectations equilibrium; Adaptive learning; Excess volatility; Inflation persistence |
| JEL: | E30 C62 D83 D84 |
| Date: | 2013–01–14 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2013014&r=cbe |
| By: | Julia Muller (Erasmus University Rotterdam); Christiane Schwieren (University of Heidelberg) |
| Abstract: | Growing interest in using personality variables in economic research leads to the question whether personality as measured by psychology is useful to predict economic behavior. Is it reasonable to expect values on personality scales to be predictive of behavior in economic games? It is undoubted that personality can influence large-scale economic outcomes. Whether personality variables can also be used to understand micro-behavior in economic games is however less clear. We discuss reasons in favor and against this assumption and test in our own experiment, whether and which personality factors are useful in predicting behavior in the trust or investment game. We can also use the trust game to understand how personality measures fare relatively in predicting behavior when situational constraints vary in strength. This approach can help economists to better understand what to expect from the inclusion of personality variables in their models and experiments, and where further research might be useful and needed. |
| Keywords: | Personality, Big Five, Five Factor Model, Incentives, Experiment, Trust Game |
| JEL: | C72 C91 D03 |
| Date: | 2012–03–26 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2012028&r=cbe |
| By: | Robert Dur (Erasmus University Rotterdam); Robin Zoutenbier (Erasmus University Rotterdam) |
| Abstract: | We examine differences in altruism and laziness between public sector employees and private sector employees. Our theoretical model predicts that the likelihood of public sector employment increases with a worker's altruism, and increases or decreases with a worker's laziness depending on his altruism. Using data from the German Socio-Economic Panel Study, we find that public sector employees are significantly more altruistic and lazy than observationally equivalent private sector employees. A series of robustness checks show that these patterns are stronger among higher educated workers; that the sorting of altruistic people to the public sector takes place only within the caring industries; and that the difference in altruism is already present at the start of people's career, while the difference in laziness is only present for employees with sufficiently long work experience. |
| Keywords: | public service motivation, altruism, laziness, sorting, public sector employment, personality characteristics |
| JEL: | H1 J45 M5 |
| Date: | 2012–12–07 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2012135&r=cbe |
| By: | Drichoutis, Andreas; Nayga, Rodolfo |
| Abstract: | We reconcile �findings from the Multiple Price List method (Andersen et al., 2008) and the Convex Time Budget method (Andreoni and Sprenger, 2012a) that seem to have generated a heated debate in the time preference literature. Specifi�cally, we discuss the claims of Andreoni and Sprenger (2012b) that "risk preferences are not time preferences" and assert that this may have been premature given that subsequent fi�ndings from replication and extension studies refute their basic conjecture while another study off�ers an alternative explanation for their results (Andersen et al., 2011a). Although the CTB seems to perform better than the MPL method in terms of predictive validity, we also discuss recent econometric issues that question the validity of claims resulting from analysis of CTB data. We also raise an issue with non-EUT explanations of Andreoni and Sprenger's (2012b) results, since the payment mechanism is not incentive compatible if the isolation assumption is not invoked. |
| Keywords: | Intertemporal choice; discounting; curvature; convex time budget; risk; multiple price list |
| JEL: | C91 D81 D91 |
| Date: | 2013–04–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:46916&r=cbe |
| By: | Te Bao (University of Amsterdam); Cars Hommes (University of Amsterdam); Joep Sonnemans (University of Amsterdam); Jan Tuinstra (University of Amsterdam) |
| Abstract: | Recent studies suggest that the type of strategic environment or expectation feedback can have a large impact on whether the market can learn the rational fundamental price. We present an experiment where the fundamental price experiences large unexpected shocks. Markets with negative expectation feedback (strategic substitutes) quickly converge to the new fundamental, while markets with positive expectation feedback (strategic complements) do not converge, but show under-reaction in the short run and over-reaction in the long run. A simple evolutionary selection model of individual learning explains these differences in aggregate outcomes. |
| Keywords: | Expectation feedback, under- and overreaction, strategic substitutes and strategic complements, heuristic switching model, experimental economics |
| JEL: | C92 G14 D84 D83 E37 |
| Date: | 2012–02–17 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2012016&r=cbe |
| By: | Abeler, Johannes (University of Oxford); Jäger, Simon (Harvard University) |
| Abstract: | How does the tax system's complexity affect people's reaction to tax changes? To answer this question, we conduct a real-effort experiment in which subjects receive a piece rate and face a set of taxes. In one treatment the tax system is simple; in the other treatment it is highly complex. The payoff-maximizing effort level and the incentives around this optimum are, however, identical across treatments. We then introduce the same sequence of additional tax rules in both treatments. We find that subjects in the complex treatment adjust their effort provision less in response to a new tax than subjects in the simple treatment. Many subjects in the complex treatment even ignore the new rule entirely, repeating their previous choice. Contrary to predictions from models of rational inattention, we find no evidence that subjects are less likely to ignore larger changes in incentives. Our results suggest that the effect of a newly introduced tax will be attenuated in a more complex tax system. |
| Keywords: | complexity, taxation, attention, salience, laboratory experiment |
| JEL: | C91 D03 H31 J22 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp7373&r=cbe |
| By: | Pedro Robalo (University of Amsterdam); Rei S. Sayag (Erasmus University Rotterdam) |
| Abstract: | The supposed irrelevance of historical costs for rational decision making has been the subject of much interest in the economic literature. In this paper we explore whether individual decision making under risk is affected by the cost of the supplied information. Outside of the lab, it is difficult to disentangle the effect of the cost of information itself from the effect of self-selection by individuals who tend to gain the most from this information. We thus create an environment in the lab where subjects are offered additional, useful and identical information on the state of the world across treatments. By varying the cost of information we can distinguish between selection and sunk cost effects. We find a systematic effect of sunk costs on the manner in which subjects update their beliefs on the state of the world. Subjects over-weigh costly information relatively to free information, which results in a 'push' of beliefs towards the extremes. This shift does not necessarily lead to behavior more attuned with Bayesian updating. |
| Keywords: | sunk cost, information, Bayesian updating, decision under risk, heuristics and biases, lab experiment |
| JEL: | C91 D81 D83 |
| Date: | 2012–12–14 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2012143&r=cbe |
| By: | Sander Hoogendoorn (University of Amsterdam); Mirjam van Praag (University of Amsterdam) |
| Abstract: | One of the most salient and relevant dimensions of team heterogeneity is ethnicity. We measure the causal impact of ethnic diversity on the performance of business teams using a randomized field experiment. We follow 550 students who set up 45 real companies as part of their curriculum in an international business program in the Netherlands. We exploit the fact that companies are set up in realistic though similar circumstances and that we, as outside researchers, had the unique opportunity to exogenously vary the ethnic composition of otherwise randomly composed teams. The student population consists of 55% students with a non-Dutch ethnicity from 53 different countries of origin. We find that a moderate level of ethnic diversity has no effect on team performance in terms of business outcomes (sales, profits and profits per share). However, if at least the majority of team members is ethnically diverse then more ethnic diversity has a positive impact on the performance of teams. In line with theoretical predictions, our data suggest that this positive effect could be related to the more diverse pool of relevant knowledge facilitating (mutual) learning within ethnically diverse teams. |
| Keywords: | Ethnic diversity, team performance, field experiment, entrepreneurship, (mutual) learning |
| JEL: | J15 L25 C93 L26 M13 D83 |
| Date: | 2012–07–13 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2012068&r=cbe |
| By: | Lucia Marchegiani (Rome 3 University); Tommaso Reggiani (University of Cologne); Matteo Rizzolli (Free University of Bozen) |
| Abstract: | Performance appraisal can be biased in two main ways: lenient supervisors assign pre- dominantly high evaluations (thus rewarding also undeserving agents who have exerted no effort) while severe supervisors assign predominantly low evaluations (thus failing to reward deserving agents who have exerted effort). The principal-agent model with moral hazard predicts that both biases will be equally detrimental to effort provision. We test this prediction with a laboratory experiment and we show that failing to reward deserving agents is significantly more detrimental than rewarding undeserving agents. This finding is compatible with empirical evidence on real world supervisors being preponderantly biased towards lenient appraisals. We discuss our result in the light of alternative economic the- ories of behavior. Our result brings interesting implications for strategic human resource management and personnel economics and contributes to the debate about incentives and organizational performance. |
| Keywords: | Agency theory, Performance appraisal, Type I and Type II errors, Leniency bias, Severity bias, Economic experiment |
| JEL: | C91 M50 J50 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:bzn:wpaper:bemps01&r=cbe |
| By: | Markus Pasche (School of Economics and Business Administration, Friedrich-Schiller-University Jena) |
| Abstract: | Behavioural economics attracted attention from environmental economists: it should help to understand why people do not respond to environmental policy measures, based on neoclassical assumptions, as predicted by theory. Moreover, understanding motives and driving forces behind pro-social, pro-environmental and cooperative behaviour should help to improve environmental policy design. The aim of this paper is a critical discussion of the way how this branch of research is interpreting the explanatory power and the normative (policy) implications of behavioural economics. |
| Keywords: | Behavioural economics, environmental economics, policy design, methodology |
| JEL: | B41 D0 D70 Q57 Q58 |
| Date: | 2013–05–08 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2013-020&r=cbe |
| By: | Djawadi, Behnud Mir (University of Paderborn); Fahr, René (University of Paderborn) |
| Abstract: | We investigate one possible explanation for observed rates of corrupt behavior namely that individual decision makers who frequently engage in illegal actions may underestimate the overall probability of being caught. This might in particular be true for petty corruption where small amounts of bribes are involved and the detection rate is rather low. To abstract from confounding effects of reciprocal behavior, we design an experiment where a public official decides upon accepting a bribe that leads to a higher present period income while facing the risk of being audited and being left with a considerable lower income in all subsequent periods. Because risk attitudes might differ when putting earned versus endowed income at risk, we compare treatments where participants either receive an endowment beforehand, or earn their income by conducting a real effort task in every period. Independent of the treatments we already find high rates of corruption in very early periods. Risk attitudes measured with a subsequent lottery-choice experiment do not correlate with the behavior observed in the corruption experiment. We explain our findings by a systematic underestimation of the overall probability of being audited. Although detection probability is small in each period, the probability of being caught only once is substantially high when engaging in corrupt behavior on a regular basis. Our findings have important political implications because the underestimation of the total risk involved in engaging in corrupt behavior might nullify measures to fight petty corruption by increased governmental auditing. |
| Keywords: | petty corruption, risk, choice bracketing, experimental economics |
| JEL: | D73 C91 D81 K4 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp7383&r=cbe |
| By: | Abeler, Johannes (University of Oxford); Nosenzo, Daniele (University of Nottingham) |
| Abstract: | Laboratory experiments have become a wide-spread tool in economic research. Yet, there is still doubt about how well the results from lab experiments generalize to other settings. In this paper, we investigate the self-selection process of potential subjects into the subject pool. We alter the recruitment email sent to first-year students, either mentioning the monetary reward associated with participation in experiments; or appealing to the importance of helping research; or both. We find that the sign-up rate drops by two-thirds if we do not mention monetary rewards. Appealing to subjects' willingness to help research has no effect on sign-up. We then invite the so-recruited subjects to the laboratory to measure a range of preferences in incentivized experiments. We do not find any differences between the three groups. Our results show that student subjects participate in experiments foremost to earn money, and that it is therefore unlikely that this selection leads to an over-estimation of social preferences in the student population. |
| Keywords: | methodology, selection bias, laboratory experiment, field experiment, other-regarding behavior, social preferences, social approval, experimenter demand |
| JEL: | C90 D03 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp7374&r=cbe |
| By: | Mago , Shakun; Samak , Anya; Sheremeta, Roman |
| Abstract: | We experimentally investigate the effect of social identification and information feedback on individual behavior in contests. In all treatments we find significant over-expenditure of effort relative to the standard theoretical predictions. Identifying subjects through photo display decreases wasteful effort. Providing information feedback about others’ effort does not affect the aggregate effort, but it decreases the heterogeneity of effort and significantly affects the dynamics of individual behavior. We develop a behavioral model which incorporates a non-monetary utility of winning and relative payoff maximization. The model explains significant over-expenditure of effort. It also suggests that decrease in ‘social distance’ between group members through photo display promotes pro-social behavior and decreases over-expenditure of effort, while improved information feedback decreases the heterogeneity of effort. |
| Keywords: | contest, information, identification, over-expenditure, experiments |
| JEL: | C72 C91 D72 D74 |
| Date: | 2013–05–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:47029&r=cbe |
| By: | Robert Dur (Erasmus University Rotterdam, CESifo, and IZA); Ben Vollaard (Tilburg University, CentER, and TILEC) |
| Abstract: | Field-experimental studies have shown that people litter more in more littered environments. Inspired by these findings, many cities around the world have adopted policies to quickly remove litter. While such policies may avoid that people follow the bad example of litterers, they may also invite free-riding on public cleaning services. We are the first to show that both forces are at play. We conduct a natural field experiment where, in a randomly assigned part of a residential area, the frequency of cleaning was drastically reduced during a threemonth period. We find evidence that some people start to clean up after themselves when public cleaning services are diminished. However, the tendency to litter more dominates. We also find evidence for persistency in these responses after the treatment has ended. |
| Keywords: | littering, public services, free-riding, field experiment |
| JEL: | C93 H40 K42 |
| Date: | 2012–07–03 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2012061&r=cbe |
| By: | Ingrid M.T. Rohde (Maastricht University, Bilgi Economics Lab of Istanbul); Kirsten I.M. Rohde (Erasmus School of Economics, Erasmus University Rotterdam) |
| Abstract: | As societies are increasingly concerned with social risks, it is important to evaluate risks not only from an individual perspective, but also from a societal one. Many increases in social risk involve a simultaneous increase in risk and inequality. This paper presents an experiment which disentangles concerns for risk and inequality in a social risk context. Subjects choose between different types of allocations of risks over 10 other participants. The allocations differ only in terms of dispersion. We disentangle four types of dispersion: ex ante inequality, ex post inequality, individual risk, and collective risk. The results show that people are averse towards ex ante inequality and individual risk, whereas they are ex post inequality and collective risk seeking. |
| Keywords: | inequality, risk, experiment |
| JEL: | D03 D63 |
| Date: | 2012–04–26 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2012045&r=cbe |
| By: | Te Bao (University of Amsterdam); John Duffy (University of Pittsburgh); Cars Hommes (University of Amsterdam) |
| Abstract: | Rational Expectations (RE) models have two crucial dimensions: 1) agents correctly forecast future prices given all available information, and 2) given expectations, agents solve optimization problems and these solutions in turn determine actual price realizations. Experimental testing of such models typically focuses on only one of these two dimensions. In this paper we consider both forecasting and optimization decisions in an experimental cobweb economy. We report results from four experimental treatments: 1) subjects form forecasts only, 2) subjects determine quantity only (solve an optimization problem), 3) they do both and 4) they are paired in teams and one member is assigned the forecasting role while the other is assigned the optimization task. All treatments converge to Rational Expectation Equilibrium (REE), but at very different speeds. We observe that performance is the best in treatment 1) and worst in the treatment 3). Most forecasters use a n adaptive expectations rule. Subjects are less likely to make conditionally optimal production decision for given forecasts in treatment 3) where the forecast is made by themselves, than in treatment 4) where the forecast is made by the other member of their team, which suggests that "two heads are better than one" in finding REE. |
| Keywords: | Learning, Rational Expectations, Optimization, Experimental Economics, Bounded Rationality |
| JEL: | C91 C92 D83 D84 |
| Date: | 2012–02–17 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2012015&r=cbe |