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on Cognitive and Behavioural Economics |
| By: | Raymundo M. Campos-Vazquez (El Colegio de Mexico); Emilio Cuilty (El Colegio de Mexico) |
| Abstract: | This study measures risk and loss aversion using Prospect Theory and the impact of emotions on those parameters. Our controlled experiment at two universities in Mexico City, using uncompensated students as research subjects, found results similar to those obtained by Tanaka et al. (2010). In order to study the role of emotions, we provided subjects with randomly varied information on rising deaths due to drug violence in Mexico and also on youth unemployment. In agreement with previous studies, we find that risk aversion on the gains domain decreases with age and income. We also find that loss aversion decreases with income and is less for students in public universities. With regard to emotions, risk aversion increases with sadness and loss aversion is negatively influenced by anger. On the loss domain, anger dominates sadness. On average, anger reduces loss aversion by half. |
| Keywords: | risk aversion; emotions; prospect theory; experiment; Mexico |
| JEL: | C93 D03 D12 O12 O54 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:emx:ceedoc:2013-05&r=cbe |
| By: | Bernd Irlenbusch (University of Cologne); Rainer Michael Rilke (University of Cologne) |
| Abstract: | This paper experimentally investigates into the effects of limited feedback on contributions in a repeated public goods game. We test whether feedback about good examples (i.e., the respective maximum contribution in a period) in contrast to bad examples (i.e., the minimum contributions) induces higher contributions. When the selection of feedback is non-transparent to the subjects, good examples boost cooperation while bad examples hamper them. No significant differences are observed between providing good or bad examples, when the feedback selection rule is transparent. Our results shed new light on how to design feedback provision in public goods settings. |
| Keywords: | Public Goods, Feedback, Imperfect Conditional Cooperation, Experiment |
| JEL: | H41 C92 D82 |
| Date: | 2013–08–07 |
| URL: | http://d.repec.org/n?u=RePEc:cgr:cgsser:04-04&r=cbe |
| By: | James Tremewan; Chloé Le Coq; Alexander D. Wagner |
| Abstract: | Using a group identity manipulation we examine the role of social preferences in an experimental one-shot centipede game. Contrary to what social preference theory would predict, we fnd that players continue longer when playing with outgroup members. The explanation we provide for this result rests on two observations: (i) players should only stop if they are suffciently conident that their partner will stop at the next node, given the exponentially-increasing payoffs in the game, and (ii) players are more likely to have this degree of certainty if they are matched with someone from the same group, whom they view as similar to themselves and thus predictable. We find strong statistical support for this argument. We conclude that group identity not only impacts a player's utility function, as identifed in earlier research, but also affects her reasoning about her partner's behavior. |
| JEL: | C72 C91 C92 D83 |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:vie:viennp:1305&r=cbe |
| By: | Meub, Lukas; Proeger, Till; Bizer, Kilian |
| Abstract: | Behavioral biases in forecasting, particularly the lack of adjustment from current values and the overall clustering of forecasts, are increasingly explained as resulting from the anchoring heuristic. Nonetheless, the classical anchoring experiments presented in support of this interpretation lack external validity for economic domains, particularly monetary incentives, feedback for learning effects and a rational strategy of unbiased predictions. We introduce an experimental design that implements central aspects of forecasting to close the gap between empirical studies on forecasting quality and the laboratory evidence for anchoring effects. Comprising more than 5,000 individual forecasts by 455 participants, our study shows significant anchoring effects. Without monetary incentives, the share of rational predictions drops from 42% to 15% in the anchor's presence. Monetary incentives reduce the average bias to one-third of its original value. Additionally, the average anchor bias is doubled when task complexity is increased, and is quadrupled when the underlying risk is increased. The variance of forecasts is significantly reduced by the anchor once risk or cognitive load is increased. Subjects with higher cognitive abilities are on average less biased toward the anchor when task complexity is high. The anchoring bias in our repeated game is not influenced by learning effects, although feedback is provided. Our results support the assumption that biased forecasts and their specific variance can be ascribed to anchoring effects. -- |
| Keywords: | anchoring,cognitive ability,forecasting,heuristics and biases,incentives,laboratory experiment |
| JEL: | C90 D03 D80 G17 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cegedp:166&r=cbe |
| By: | Meub, Lukas; Proeger, Till; Hüning, Hendrik |
| Abstract: | This paper experimentally investigates social learning in a two-agent prediction game with both exogenous and endogenous ordering of decisions and a continuous action space. Given that individuals regularly fail to apply rational timing, we refrain from implementing optimal timing of decisions conditional on signal strength. This always renders it optimal to outwait the other player regardless of private signals and induces a gamble on the optimal timing and action. In this setting, we compare exogenous and endogenous ordering in terms of informational efficiency, strategic delay and social welfare. We find that more efficient observational learning leads to more accurate predictions in the endogenous treatments and increases informational efficiency compared to the benchmark exogenous treatment. Overall, subjects act sensitively to waiting costs, with higher costs fostering earlier decisions that reduce informational efficiency. For a simple implementation of waiting costs, subjects more successfully internalize information externalities by adjusting their timing according to signal strength. Simultaneous decisions in endogenous ordering avoid observational learning and compensate the higher degree of rational decisions. Overall, endogenous timing has no net effect on social welfare, as gains in accuracy are fully compensated by waiting costs. Our results hold relevance for social learning environments characterized by a continuous action space and the endogenous timing of decisions. -- |
| Keywords: | Endogenous Timing,Information Externalities,Laboratory Experiment,Social Learning,Strategic Delay |
| JEL: | C91 D82 D83 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cegedp:167&r=cbe |
| By: | Duersch, Peter; Römer, Daniel; Roth, Benjamin |
| Abstract: | To make predictions with theories, usually we assume an individual's characteristics such as uncertainty preferences to be stable over time. In this paper, we analyze the stability of ambiguity preferences experimentally. We repeatedly elicit ambiguity attitudes towards multiple 3-color Ellsberg urns over a period of two months. In our data, 57% of the choices are consistent with stable preferences over the time of observation. This share is significantly higher than random choices would suggest, but significantly lower than the level of consistency in a control treatment without a time lag (71%). Interestingly, for subjects who are able to recall their decision after two months correctly, the share of consistent choices does not drop significantly over time. |
| Keywords: | ambiguity; stability of preferences; experiment |
| Date: | 2013–08–13 |
| URL: | http://d.repec.org/n?u=RePEc:awi:wpaper:0548&r=cbe |
| By: | Ihli, Hanna Julia; Mußhoff, Oliver |
| Abstract: | In this study, we experimentally analyze the investment behavior of smallholder farmers in Uganda. We consider a problem of optimal stopping, stylizing an option to invest in a project. We ascertain whether, and to what extent, the real options approach and the classical investment theory can predict farmers’ investment behaviors. We also examine differences in the investment behavior with respect to the presence of a price floor, which is often used to stimulate investments. Furthermore, we look at learning effects. Our results show that both theories do not exactly explain the observed investment behavior. However, our results suggest that real options models better predict the decision behavior of farmers than the classical investment theory. The presence of a price floor and learning from personal experience during the experiment do not significantly affect the investment behavior. However, we find that specific socio-demographic and socio-economic characteristics affect the investment behavior of farmers. |
| Keywords: | experimental economics, investment, price floors, real options, Uganda, Farm Management, Institutional and Behavioral Economics, Political Economy, Risk and Uncertainty, C91, D03, D81, D92, |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:ags:gagfdp:154775&r=cbe |
| By: | Pepper, Alexander; Gore, Julie |
| Abstract: | The world-wide inflation in executive compensation in recent years has been accompanied by an increase in the prevalence of long-term incentives. This article demonstrates how the subjectively perceived value of long-term incentives is affected by risk aversion, uncertainty aversion, and time preferences. Based on a unique empirical study which involved collecting primary data on executive preferences from around the world, and using a theoretical framework which draws on behavioral agency theory, we conclude that, while long-term incentives are perceived by executives to be effective, they are not in fact an efficient form of reward, and that this outcome is not significantly affected by cross-cultural differences. We conjecture that boards of directors, acting on behalf of shareholders, increase the size of long-term incentive awards in order to compensate executives for the perceived loss of value when compared with less risky, more certain and more immediate forms of reward. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:ner:lselon:http://eprints.lse.ac.uk/51655/&r=cbe |
| By: | Ruben Durante; Louis Putterman; Joël van der Weele |
| Abstract: | We conduct a laboratory experiment to study how demand for redistribution of income depends on self-interest, insurance motives, and social concerns relating to inequality and efficiency. Our choice environments feature large groups of subjects and real world framing, and differ with respect to the source of inequality (earned or arbitrary), the cost of taxation to the decision maker, the dead-weight loss of taxation, uncertainty about own pre-tax income, and whether the decisionmaker is affected by redistribution. We estimate utility weights for the different sources of demand for redistribution, with the potential to inform modeling in macroeconomics and political economy. |
| Keywords: | income distribution, political economy, redistribution, social preferences. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:bro:econwp:2013-7&r=cbe |
| By: | Nava Ashraf; Oriana Bandiera; Scott Lee |
| Abstract: | Organizations often use awards to incentivize performance. We design a field experiment to unbundle the mechanisms through which awards may affect behavior: by facilitating social comparison and by conferring recognition and visibility. In a nationwide health worker training program in Zambia, employer recognition and social visibility increase performance while social comparison reduces it, especially for low-ability trainees. These effects appear when treatments are announced and persist through training. The findings are consistent with a model of optimal expectations in which low-ability individuals exert low effort in order to avoid information about their relative ability. |
| Keywords: | awards, social comparison, optimal expectations, incentives. |
| JEL: | D84 D83 J33 M52 O15 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:cep:stieop:46&r=cbe |
| By: | Charles Manski (Northwestern University); Claudia Neri (University of St.Gallen) |
| Abstract: | We study first- and second-order subjective expectations (beliefs) in strategic decision-making. We propose a method to elicit probabilistically both first- and second-order beliefs and apply the method to a Hide-and-Seek experiment. We study the relationship between choice and beliefs in terms of whether observed choice coincides with the optimal action given elicited beliefs. We study the relationship between first- and second-order beliefs under a coherence criterion. Weak coherence requires that if an event is assigned, according to first-order beliefs, a probability higher/lower/equal to the one assigned to another event, then the same holds according to second-order beliefs. Strong coherence requires the probability assigned according to first- and second-order beliefs to coincide. Evidence of heterogeneity across participants is reported. Verbal comments collected at the end of the experiment shed light on how subjects think and decide in a complex environment that is strategic, dynamic and populated by potentially heterogeneous individuals. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:73&r=cbe |
| By: | Guillén, Pablo; Hing, Alexander |
| Abstract: | We test the effect of advice on the well known top trading cycles (TTC) matching algorithm in a school choice frame work. We compare three treatments involving third party advice [right advice (R), wrong advice (W), and both right and wrong advice (RW)] to a no-advice baseline (B). In line with previous literature the truth telling rate is higher than 80% in the baseline, but it becomes as low as 35% in the W treatment. Truth telling rates are also significantly lower in R than in B, and much lower in RW than in B. This evidence suggests that a vast majority of participants in our experiment were confused. Truth telling seems to work only as a default strategy, and participants can be heavily influenced by advice. The real life implementation of matching mechanisms may have been misguided by some laboratory experimentation. |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:syd:wpaper:2123/9255&r=cbe |
| By: | Yamamoto, Wataru |
| Abstract: | This study demonstrates how ethical attributes of goods affect market outcomes on the basis of market data and actual ethical campaigns. Among the various types of such attributes, such as eco-label and fair trade label, I focus on cause-related marketing (CRM), which economists study less frequently than other ethical attributes. Researchers who analyzed this topic focused largely on experimental data, which has less noise and enables researchers to obtain the pure effect of ethical attributes on market outcomes. However, ethical attributes in practice sometimes en-counter ignorance and even criticism by consumers who deem it as a mere marketing strategy, rather than a truly ethical campaign. These issues play weak role in experimental data estimates because brands and cam-paigns are typically artificial, but the important question is how ethical attributes work in the real marketplace. Therefore, I analyze this issue by estimating the demand for CRM on the basis of scanner data of the US bottled water market and actual campaigns. Surprisingly, the results indicate that CRM decrease sales and suggest that negative consequences of ethical campaigns may occur in the real marketplace. |
| Keywords: | Cause-related marketing; Ethical Consumption; Charity; Philanthropy; Public Economics; Altruistic Behavior |
| JEL: | D64 H41 M14 |
| Date: | 2013–08–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:49070&r=cbe |
| By: | Boris Gershman |
| Abstract: | The evil eye belief is a widespread superstition according to which envious people can cause harm by a mere glance at coveted objects or their owners. This paper argues that such belief originated and persisted as a useful heuristic under conditions in which destructive envy represents a real threat and envy-avoidance behavior, e ffectively prescribed by the evil eye belief, is a proper response to this threat. Historically, increasing wealth di fferentiation raised the risk of envy-induced destructive behavior leading to the emergence and spread of the evil eye belief. Evidence from small-scale preindustrial societies shows that there is indeed a robust positive association between the incidence of the belief and measures of wealth inequality, controlling for continental fixed eff ects and potential confounding factors such as patterns of spatial and cross-cultural diffusion and various dimensions of early economic development. Furthermore, the evil eye belief is more likely to be present in agro-pastoral societies that tend to sustain higher levels of inequality and where vulnerable material wealth plays a dominant role in the subsistence economy. |
| Keywords: | Evil eye belief, Envy, Inequality, Culture, Superstition |
| JEL: | D31 D74 N30 O10 Z10 Z13 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:amu:wpaper:2013-14&r=cbe |