Discussion Papers

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Discussion Paper No. 283
May 26, 2021

Overconfidence and the Political and Financial Behavior of a Representative Sample

Authors:

Ahrens, Steffen (FU Berlin)
Bosch-Rosa, Ciril (TU Berlin)
Kassner, Bernhard (LMU Munich)

Abstract:

We study the relationship between overconfidence and the political and financial behavior of a nationally representative sample. To do so, we introduce a new method of eliciting overconfidence that is simple to understand, quick to implement, and captures respondents' excess confidence in their own judgment. Our results show that, in line with theoretical predictions, an excessive degree of confidence in one's judgment is correlated with lower portfolio diversification, larger stock price forecasting errors, and more extreme political views. Additionally, we find that overconfidence is correlated with voting absenteeism. These results appear to validate our method and show how overconfidence is a bias that permeates several aspects of peoples' life.

Keywords:

overconfidence; soep; survey

JEL-Classification:

C83; D91; G41

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Discussion Paper No. 281
February 26, 2021

The Indirect Fiscal Benefits of Low-Skilled Immigration

Authors:

Colas, Mark (University of Oregon)
Sachs, Dominik (LMU Munich)

Abstract:

Low-skilled immigrants indirectly affect public finances through their effect on native wages & labor supply. We operationalize this indirect fiscal effect in various models of immigration and the labor market. We derive closed-form expressions for this effect in terms of estimable statistics. Empirical quantifications for the U.S. reveal that the indirect fiscal benefit of one low-skilled immigrant lies between $770 and $2,100 annually. The indirect fiscal benefit may outweigh the negative direct fiscal effect that has previously been documented. This challenges the perception of low-skilled immigration as a fiscal burden.

Keywords:

immigration; fiscal impact; general equilibrium

JEL-Classification:

H20; J31; J62; J68

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Discussion Paper No. 280
February 26, 2021

Costly Information Acquisition in Centralized Matching Markets

Authors:

Hakimov, Rustamdjan (University of Lausanne and WZB Berlin)
Kübler, Dorothea (WZB Berlin and TU Berlin)
Pan, Siqi (University of Melbourne)

Abstract:

Every year during school and college admissions, students and their parents devote considerable time and effort to acquiring costly information about their own preferences. In a market where students are ranked by universities based on exam scores, we explore ways to reduce wasteful information acquisition - that is, to help students avoid acquiring information about their out-of-reach schools or universities - using a market design approach. We find that, both theoretically and experimentally, a sequential serial dictatorship mechanism leads to less wasteful information acquisition and higher student welfare than a direct serial dictatorship mechanism. This is because the sequential mechanism informs students about which universities are willing to admit them, thereby directing their search. Additionally, our experiments show that the sequential mechanism has behavioral advantages because subjects deviate from the optimal search strategy less frequently under the sequential than under the direct mechanism. We also investigate the effects of providing historical cutoff scores under the direct mechanism. We find that the cutoff provision can increase student welfare, especially when the information costs are high, although the effect is weaker than that of a sequential mechanism.

Keywords:

matching market; deferred acceptance; information acquisition; game theory; lab experiment

JEL-Classification:

C92; D47

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Discussion Paper No. 279
February 26, 2021

Teams and Individuals in Standard Auction Formats: Decisions and Emotions

Authors:

Karmeliuk, Maria (LMU Munich)
Kocher, Martin (University of Vienna)

Abstract:

Our study compares individual and team bidding in standard auction formats: first-price, second-price and ascending-price (English) auctions with independent private values. In a laboratory experiment, we find that individuals overbid more than teams in first-price auctions and deviate more from bidding their own value in second-price auctions. However we observe no difference in bidding behavior in English auctions. Based on control variables, we claim that the observed difference can be explained by better reasoning abilities of teams. Emotions play a role in determining bids, but the effect of emotions on bidding does not differ between individuals and teams.

Keywords:

auctions; team decision-making; experiment; overbidding

JEL-Classification:

C91; C92; D44

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Discussion Paper No. 278
February 26, 2021

Leadership Styles and Labor-Market Conditions

Authors:

Dur, Robert (Erasmus University Rotterdam)
Kvaloy, Ola (University of Stavanger)
Schöttner, Anja (HU Berlin)

Abstract:

Why do some leaders use praise as a means to motivate workers, while other leaders use social punishment? This paper develops a simple economic model to examine how leadership styles depend on the prevailing labor-market conditions for workers. We show that the existence of a binding wage floor for workers (e.g., due to trade union wage bargaining, minimum-wage legislation, or limited-liability protection) can make it attractive for firms to hire a leader who makes use of social punishment. While the use of social punishments generally is socially inefficient, it lessens the need for high bonus pay, which allows the firm to extract rents from the worker. In contrast, firms hire leaders who provide praise to workers only if it is socially efficient to do so. Credible use of leadership styles requires either repeated interaction or a leader with the right social preferences. In a single-period setting, only moderately altruistic leaders use praise as a motivation tool, whereas only moderately spiteful leaders use social punishment. Lastly, we show that when the leaders' and workers' reservation utilities give rise to a bigger income gap between leaders and workers, attracting spiteful leaders becomes relatively less costly and unfriendly leadership becomes more prevalent.

Keywords:

leadership styles; incentives; motivation; social preferences; labor-market conditions; wage-setting

JEL-Classification:

M05

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Discussion Paper No. 277
February 26, 2021

Can Mentoring Alleviate Family Disadvantage in Adolescence? A Field Experiment to Improve Labor-Market Prospects

Authors:
Resnjanskij, Sven (ifo Institute)
Ruhose, Jens (Kiel University)
Wiederhold, Simon (Catholic University Eichstaett-Ingolstadt)
Woessmann, Ludger (ifo Institute and LMU Munich)
Abstract:

We study a mentoring program that aims to improve the labor-market prospects of school-attending adolescents from disadvantaged families by offering them a university-student mentor. Our RCT investigates program effectiveness on three outcome dimensions that are highly predictive of adolescents´ later labor-market success: math grades, patience/social skills, and labor-market orientation. For low-SES adolescents, the one-to-one mentoring increases a combined index of the outcomes by half a standard deviation after one year, with significant increases in each dimension. Part of the treatment effect is mediated by establishing mentors as attachment figures who provide guidance for the future. The mentoring is not effective for higher-SES adolescents. The results show that substituting lacking family support by other adults can help disadvantaged children at adolescent age.

Keywords:
mentoring; disadvantaged youths; adolescence; school performance; patience; social skills; labor-market orientation; field experiment
JEL-Classification:
I24; J24; H52
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Discussion Paper No. 276
February 5, 2021

Do Robo-Advisors Make Us Better Investors?

Author:

Back, Camila (LMU Munich)
Morana, Stefan (Saarland University)
Spann, Martin (LMU Munich)

Abstract:

Investors increasingly can obtain assistance from “robo-advisors,” artificial intelligence–enabled digitalized service agents imbued with anthropomorphic design elements that can communicate using natural language. The present article considers the impact of anthropomorphized robo-advisors on investment decisions, with a focus on their ability to mitigate investors’ behavioral biases. We study the well-documented disposition effect, which reflects investors’ greater propensity to realize past gains than past losses. In two induced-value laboratory experiments, the availability of a robo-advisor reduces (i.e., mitigates) investors’ disposition effect. This relationship is mediated by two simultaneous (indirect) effects: the extent of requests for the robo-advisor’s investment advice and perceptions of its socialness. These findings resonate with cognitive dissonance theory, which predicts that assigning responsibility to the advisor helps investors resolve a sense of discomfort that may arise after a financial loss. Anthropomorphic design elements alone are not sufficient to reduce the disposition effect, but they decrease investors’ propensity to seek advice, which offsets the positive (indirect) effect of perceived socialness. These results have implications for the ongoing automation of advisory services, as well as for improving decision making, and suggest some further research directions.

Keywords:

robo-advisors; artificial intelligence; advice; anthropomorphism; disposition effect

JEL-Classification:

D91; D83; D84; G11; G41

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Discussion Paper No. 275
January 26, 2021

Meta-Analysis of Empirical Estimates of Loss-Aversion

Author:

Brown, Alexander L. (Texas A&M University)
Imai, Taisuke (LMU Munich)
Vieider, Ferdinand M. (Ghent University)
Camerer, Colin F. (California Institute of Technology)

Abstract:

Loss aversion is one of the most widely used concepts in behavioral economics. We conduct a large-scale interdisciplinary meta-analysis, to systematically accumulate knowledge from numerous empirical estimates of the loss aversion coefficient reported during the past couple of decades. We examine 607 empirical estimates of loss aversion from 150 articles in economics, psychology, neuroscience, and several other disciplines. Our analysis indicates that the mean loss aversion coefficient is between 1.8 and 2.1. We also document how reported estimates vary depending on the observable characteristics of the study design.

Keywords:

loss aversion; prospect theory; meta-analysis

JEL-Classification:

D81; D90; C90; C11

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Discussion Paper No. 274
January 26, 2021

Portfolio Liquidation under Factor Uncertainty

Author:

Horst, Ulrich (HU Berlin)
Xia, Xiaonyu (HU Berlin)
Zhou, Chao (National University of Singapore)

Abstract:

We study an optimal liquidation problem under the ambiguity with respect to price impact parameters. Our main results show that the value function and the optimal trading strategy can be characterized by the solution to a semi-linear PDE with superlinear gradient, monotone generator and singular terminal value. We also establish an asymptotic analysis of the robust model for small amounts of uncertainty and analyze the effect of robustness on optimal trading strategies and liquidation costs. In particular, in our model ambiguity aversion is observationally equivalent to increased risk aversion. This suggests that ambiguity aversion increases liquidation rates.

Keywords:

stochastic control; uncertainty; portfolio liquidation; singular terminal value; superlinear growth gradient

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Discussion Paper No. 273
January 21, 2021

Alcohol and Short-Run Mortality: Evidence from a Modern-Day Prohibition

Author:

Barron, Kai (WZB Berlin)
Bradshaw, Debbie (SAMRC & University of Cape Town)
Parry, Charles D. H. (SAMRC & Stellenbosch University)
Dorrington, Rob (University of Cape Town)
Groenewald, Pam (SAMRC)
Laubscher, Ria (SAMRC)
Matzopoulos, Richard (SAMRC & University of Cape Town)

Abstract:

On July 13, 2020 a complete nation-wide ban was placed on the sale and transport of alcohol in South Africa. This paper evaluates the impact of this sudden and unexpected five-week alcohol prohibition on mortality due to unnatural causes. We find that the policy reduced the number of unnatural deaths by 21 per day, or approximately 740 over the five-week period. This constitutes a 14% decrease in the total number of deaths due to unnatural causes. We argue that this represents a lower bound on the impact of alcohol on short-run mortality, and underscores the severe influence that alcohol has on society—even in the short-run.

Keywords:

alcohol; mortality; economics; health; South Africa; COVID-19; violence

JEL-Classification:

I18; I12; K42

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