Incentives and Information as Driving Forces of Default Effects

Incentives and Information as Driving Forces of Default Effects

Date:	2013-09
By:	Altmann, Steffen (IZA) Falk, Armin (University of Bonn) Grunewald, Andreas (University of Bonn)
URL:	http://d.repec.org/n?u=RePEc:iza:izadps:dp7610&r=net
	The behavioral relevance of non-binding default options is well established. While most research has focused on decision makers’ responses to a given default, we argue that this individual decision making perspective is incomplete. Instead, a comprehensive understanding of the foundation of default effects requires taking account of the strategic interaction between default setters and decision makers. We provide a theoretical framework to analyze which default options arise in such interactions, and which defaults are more likely to affect behavior. The key drivers are the relative level of information of default setters and decision makers, and their alignment of interests. We show that default effects are more pronounced if interests of the default setter and decision makers are more closely aligned. Moreover, decision makers are more likely to follow default options the less they are privately informed about the relevant decision environment. In the second part of the paper we experimentally test the main predictions of the model. We report evidence that both the alignment of interests as well as the relative level of information are key determinants of default effects. An important policy relevant conclusion is that potential distortions arising from default options are unlikely if decision makers are either well-informed or reflect on the interests of default setters.
Keywords:	default options, libertarian paternalism, behavioral economics, incentives, laboratory experiment
JEL:	D03

Managing self-confidence: theory and experimental evidence

Managing self-confidence: theory and experimental evidence

Date:	2011
By:	Markus Mobius Muriel Niederle Paul Niehaus Tanya S. Rosenblat
URL:	http://d.repec.org/n?u=RePEc:fip:fedbwp:11-14&r=net
	Evidence from social psychology suggests that agents process information about their own ability in a biased manner. This evidence has motivated exciting research in behavioral economics, but also garnered critics who point out that it is potentially consistent with standard Bayesian updating. We implement a direct experimental test. We study a large sample of 656 undergraduate students, tracking the evolution of their beliefs about their own relative performance on an IQ test as they receive noisy feedback from a known data-generating process. Our design lets us repeatedly measure the complete relevant belief distribution incentive-compatibly. We find that subjects (1) place approximately full weight on their priors, but (2) are asymmetric, over-weighting positive feedback relative to negative, and (3) conservative, updating too little in response to both positive and negative signals. These biases are substantially less pronounced in a placebo experiment where ego is not at stake. We also find that (4) a substantial portion of subjects are averse to receiving information about their ability, and that (5) less confident subjects are more likely to be averse. We unify these phenomena by showing that they all arise naturally in a simple model of optimally biased Bayesian information processing.
Keywords:	Human behavior ; Bayesian statistical decision theory

Comment on Promises and Partnership

Comment on Promises and Partnership

Date: 2011-04-11

By: Cary Deck

Maroš Servátka

Steven Tucker (University of Canterbury)

URL: http://d.repec.org/n?u=RePEc:cbt:econwp:11/14&r=net

Charness and Dufwenberg (2006) find that promises increase cooperation and suggest that the behavior of subjects in their experiment is driven by guilt aversion. By modifying the procedures to include a double blind social distance protocol we test an alternative explanation that promise keeping was due to external influence and reputational concerns. Our data are statistically indistinguishable from those of Charness and Dufwenberg and therefore provide strong evidence that their observed effects regarding the impact of communication are due to internal factors and not due to an outside bystander.

Keywords: Experiment; promises; partnership; guilt aversion; psychological game theory; trust; lies; social distance; behavioral economics; hidden action

JEL: C70

REFERENCES

Battigalli, P. and M. Dufwenberg (2007) “Guilt in Games,” American Economic Review Papers & Proceedings, 97(2), 170-76.

Battigalli, P. and M. Dufwenberg (2008) “Dynamic Psychological Games,” Journal of Economic Theory, 144(1), 1-35.

Berg, J., J. Dickhaut, and K. McCabe (1995) “Trust, Reciprocity and Social History,” Games and Economic Behavior, 10 (1), 122-42.

Charness, G. and M. Dufwenberg (2006) “Promises and Partnership,” Econometrica 74(6), 1579-1601.

Cox, J.C. (2004) “How to Identify Trust and Reciprocity” Games and Economic Behavior, 46 (2), 260-81.

Cox, J. C. (2009) “Trust and Reciprocity: Implications of Game Triads and Social Contexts,” New Zealand Economic Papers. Special Issue: Laboratory Experiments in Economics, Finance and Political Science, 43(2), 89 – 104.