Discussion Papers

Discussion Paper No. 170
July 30, 2019

Belief Updating: Does the ‘Good-News, Bad-News’ Asymmetry Extend to Purely Financial Domains?

Author:
Barron, Kai (WZB Berlin)
Abstract:

Bayes' statistical rule remains the status quo for modeling belief updating in both normative and descriptive models of behavior under uncertainty. Some recent research has questioned the use of Bayes' rule in descriptive models of behavior, presenting evidence that people overweight 'good news' relative to 'bad news' when updating ego-relevant beliefs. In this paper, we present experimental evidence testing whether this 'good-news, bad-news' effect is present in a financial decision making context (i.e. a domain that is important for understanding much economic decision making). We find no evidence of asymmetric updating in this domain. In contrast, in our experiment, belief updating is close to the Bayesian benchmark on average. However, we show that this average behavior masks substantial heterogeneity in individual updating. We find no evidence in support of a sizeable subgroup of asymmetric updators.

Keywords:
economic experiments; bayes' rule; belief updating; belief measurement; proper scoring rules; motivated beliefs
JEL-Classification:
C11; C91; D83
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Discussion Paper No. 169
July 30, 2019

Confidence and Career Choices: An Experiment

Authors:
Barron, Kai (WZB Berlin)
Gravert, Christina (University of Copenhagen)
Abstract:

Confidence is often seen as the key to success. Empirical evidence about how such beliefs about one's abilities causally map into actions is, however, sparse. In this paper, we experimentally investigate the causal effect of an increase in confidence about one's own ability on two central choices made by workers in the labor market: choosing between jobs with different incentive schemes, and the subsequent choice of how much effort to exert within the job. An exogenous increase in confidence leads to an increase in subjects' propensity to choose payment schemes that depend heavily on ability. This is detrimental for low ability workers. Policy implications are discussed.

Keywords:
overconfidence; experiment; beliefs; real-effort; career choices
JEL-Classification:
C91; D03; M50; J24
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Discussion Paper No. 168
July 30, 2019

Meta-Analysis of Present-Bias Estimation Using Convex Time Budgets

Authors:

Imai, Taisuke (LMU Munich)
Rutter, Tom (Stanford University)
Camerer, Colin (California Institute of Technology)

Abstract:

We examine 220 estimates of the present-bias parameter from 28 articles using the Convex Time Budget protocol. The literature shows that people are on average present biased, but the estimates exhibit substantial heterogeneity across studies. There is evidence of modest selective reporting in the direction of overreporting present-bias. The primary source of the heterogeneity is the type of reward, either monetary or non-monetary reward, but the effect is weakened after correcting for potential selective reporting. In the studies using the monetary reward, the delay until the issue of the reward associated with the "current" time period is shown to influence the estimates of present bias parameter.

Keywords:

present bias; structural behavioral economics; meta-analysis; selective reporting

JEL-Classification:

D90; C91

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Discussion Paper No. 167
July 30, 2019

The Formation of Prosociality: Causal Evidence on the Role of Social Environment

Authors:

Kosse, Fabian (LMU Munich)
Deckers, Thomas (University of Bonn)
Pinger, Pia (University of Bonn)
Schildberg-Hörisch, Hannah (DICE)
Falk, Armin (University of Bonn)

Abstract:

This study presents descriptive and causal evidence on the role of social environment for the formation of prosociality. In a first step, we show that socio-economic status (SES) as well as the intensity of mother-child interaction and mothers' prosocial attitudes are systematically related to elementary school children's prosociality. In a second step, we present evidence on a randomly-assigned variation of the social environment, providing children with a mentor for the duration of one year. Our data include a two-year follow-up and reveal a significant and persistent increase in prosociality in the treatment relative to the control group. Moreover, enriching the social environment bears the potential to close the observed gap in prosociality between low and high SES children. A mediation analysis of the observed treatment effect suggests that prosociality develops in response to stimuli in the form of prosocial role models and intense social interactions.

Keywords:

formation of preferences; prosociality; social preferences; trust; social inequality

JEL-Classification:

D64; C90

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Discussion Paper No. 166
July 26, 2019

Socio-Economic Status and Inequalities in Children’s IQ and Economic Preferences

Authors:

Falk, Armin (University of Bonn)
Kosse, Fabian (LMU Munich)
Pinger, Pia (University of Bonn)
Schildberg-Hörisch, Hannah (DICE)
Deckers, Thomas (University of Bonn)

Abstract:

This paper explores inequalities in IQ and economic preferences between children from high and low socio-economic status (SES) families. We document that children from high SES families are more intelligent, patient and altruistic, as well as less risk-seeking. To understand the underlying causes and mechanisms, we propose a framework of how parental investments as well as maternal IQ and economic preferences influence a child's IQ and preferences. Within this framework, we allow SES to influence both the level of parental time and parenting style investments, as well as the productivity of the investment process. Our results indicate that disparities in the level of parental investments hold substantial importance for SES gaps in economic preferences and, to a lesser extent, IQ. In light of the importance of IQ and preferences for behaviors and outcomes, our findings offer an explanation for social immobility

Keywords:

socio-economic status; time preferences; risk preferences; altruism; experiments with children; origins of preferences; human capital

JEL-Classification:

C90; D64; D90; D81; J13; J24; J62

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Discussion Paper No. 165
July 11, 2019

Trade Exposure and the Decline in Collective Bargaining: Evidence From Germany

Authors:

Baumgarten, Daniel (LMU)
Lehwald, Sybille (Federal Ministry for Economic Affairs and Energy)

Abstract:

We analyze the effect of the increase in trade exposure induced by the rise of China and the transformation of Eastern Europe on collective bargaining coverage of German plants in the period 1996-2008. We exploit cross-industry variation in trade exposure and use trade flows of other high-income countries as instruments for German trade exposure. We find that increased import exposure has led to an increase in the probability of German plants leaving industry-wide bargaining agreements, accounting for about one fifth of the overall decline in the German manufacturing sector. The effect is most pronounced for small and medium-sized plants.

Keywords:

international trade; import competition; collective bargaining

JEL-Classification:

F16; J51

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Discussion Paper No. 164
July 3, 2019

An Economic Model of the Meat Paradox

Authors:

Hestermann, Nina (University of St Andrews)
Le Yaouanq, Yves (LMU Munich)
Treich, Nicolas (Toulouse School of Economics and INRA)

Abstract:

Many individuals have empathetic feelings towards animals but frequently consume meat. We investigate this "meat paradox" using insights from the literature on motivated reasoning in moral dilemmata. We develop a model where individuals form self-serving beliefs about the suffering of animals caused by meat consumption in order to alleviate the guilt associated with their dietary choices. The model makes several specific predictions: in particular, it predicts a positive relationship between individuals' taste for meat and their propensity to engage in self-deception, a high price elasticity of demand for meat, and a causal effect of prices and aggregate consumption on individual beliefs.

Keywords:

motivated reasoning; moral dilemmata; self-deception; meat paradox; meat price-elasticity; animal welfare

JEL-Classification:

D72; D81; D83; D84; Z13

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Discussion Paper No. 163
June 28, 2019

Firm Organization with Multiple Establishments

Authors:

Gumpert, Anna (LMU Munich)
Steimer, Henrike (Stanford GSB)
Antoni, Manfred (Institut für Arbeitsmarkt- und Berufsforschung)

Abstract:

How do geographic frictions affect firm organization? We show theoretically and empirically that geographic frictions increase the use of middle managers in multi-establishment firms. In our model, we assume that a CEO's time is a resource in limited supply, shared across headquarters and establishments. Geographic frictions increase the costs of accessing the CEO. Hiring middle managers at one establishment substitutes for CEO time, which is reallocated across all establishments. Consequently, geographic frictions between the headquarters and one establishment affect the organization of all establishments of a firm. Our model is consistent with novel facts about multi-establishment firm organization that we document using administrative data from Germany. We exploit the opening of high-speed train routes to show that not only the establishments directly affected by faster travel times but also the other establishments of the firm adjust their organization. Our findings imply that local conditions propagate across space through firm organization.

Keywords:

firm organization; multi-establishment firm; knowledge hierarchy; geography

JEL-Classification:

D21; D22; D24

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Discussion Paper No. 162
June 26, 2019

Heads We Both Win, Tails Only You Lose: the Effect of Limited Liability On Risk-Taking in Financial Decision Making

Authors:

Ahrens, Steffen (TU Berlin)
Bosch-Rosa, Ciril (TU Berlin)

Abstract:

One of the reasons for the recent crisis is that financial institutions took "too much risk" (Brunnermeier, 2009; Taylor et al., 2010). Why were these institutions taking so much risk is an open question. A recent strand in the literature points towards the "cognitive dissonance" of investors who, because of the limited liability of their investments, had a distorted view of riskiness (e.g., Barberis (2013); Benabou (2015)). In a series of laboratory experiments we show how limited liability does not affect the beliefs of investors, but does increase their willing exposure to risk. This results points to a simple explanation for the over-investment of banks and hedge-funds: When incentives are not aligned, investors take advantage of the moral hazard opportunities.

Keywords:

moral hazard; cognitive dissonance; behavioral finance

JEL-Classification:

C91; D84; G11; G41

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Discussion Paper No. 161
June 26, 2019

Price Dynamics and Trader Overconfidence

Authors:

Ahrens, Steffen (TU Berlin)
Bosch-Rosa, Ciril (TU Berlin)
Roulund, Rasmus (Danmarks Nationalbank)

Abstract:

Overconfidence is one of the most important biases in financial markets and commonly associated with excessive trading and asset market bubbles. So far, most of the finance literature takes overconfidence as a given, "static" personality trait. In this paper we introduce a novel experimental design which allows us to track different measures of overconfidence during an asset market bubble. The results show that overconfidence co-moves with asset prices and points towards a feedback loop in which overconfidence adds fuel to the flame of existing bubbles.

Keywords:

overconfidence; experiment; asset markets

JEL-Classification:

C91; D84; G11; G41

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