Overconfidence in Investment Decisions: An Experimental Approach

We experimentally test overconfidence in investment decisions by offering participants the possibility to substitute their own for alternative investment choices. Overall, 149 subjects participated in two experiments, one with just one risky asset, the other with two risky assets. Overconfidence increases (i) with the absolute deviation from optimal choices, (ii) with task complexity, and (iii) decreases with uncertainty as indicated by the difference between willingness to pay and to accept.risky decision making, behavioral finance, portfolio choice, experimental economics

Illusion of Expertise in Portfolio Decisions - An Experimental Approach

Overall, 72 subjects invest their endowment in four risky assets. Each com-bination of assets yields the same expected return and variance of returns. Illusion of expertise prevails when one prefers nevertheless the self-selected portfolio. After being randomly assigned to groups of four subjects are asked to elect their "expert" based on responses to a prior decision task. Using the random price mecha-nism reveals that 64% of the subjects prefer their own portfolio over the average group portfolio or the expert’s port-folio. Illusion of expertise is shown to be stable individually, over alternatives, and for both eliciting methods, willingness to pay and to accept.investment decisions, portfolio selection, overconfidence, unrealistic optimism, illusion of control, endowment effect

Tax avoidance, tax evasion, and tax flight: Do legal differences matter?

Although from an economic point of view, legal considerations apart, tax avoidance, tax evasion and tax flight have similar effects, namely a reduction of revenue yields, and are based on the same desire to reduce the tax burden, it is likely that individuals perceive them as different and as unequally fair. Overall, 252 fiscal officers, business students, business lawyers, and entrepreneurs produced spontaneous associations to a scenario either describing tax avoidance, tax evasion, or tax flight, and evaluated it as positive, neutral or negative. The results indicate that social representations differ with respect to tax avoidance, tax evasion, and tax flight. Tax evasion was perceived rather negatively, tax flight neutrally, and tax avoidance positively. Tax knowledge was found not to be correlated neither with tax avoidance nor with tax evasion.tax evasion; social representations; tax knowledge

Costs of implementation: Bargaining costs versus allocative efficiency

A mechanism with low direct cost of use may be preferred to alternatives implementing more efficient allocations. We show this experimentally by giving pairs of subjects the option to agree on a single average price for a sequence of trades—in effect pooling several small bargains into a larger one. We make pooling costly by tying it to some inefficient trades, but subjects nevertheless reveal strong tendencies to pool, particularly when more bargains remain to be struck and when bargaining is face to face. The results suggest that implementation costs could play a significant role in the use of many common trading practices

Collective nostalgia and domestic country bias.

Three experiments tested and supported the hypothesis that collective nostalgia-nostalgia that is experienced when one thinks of oneself in terms of a particular social identity or as a member of a particular group and that concerns events or objects related to this group-increases individuals' ethnocentric preference for ingroup (compared to outgroup) products. Greek participants who recalled collective nostalgic experiences shared with other Greeks (compared to controls) evinced a highly robust preference for Greek (compared to foreign) consumer products. This preference is referred to as domestic country bias. Following a systematic replicate-and-extend strategy, we demonstrated that both idiographic and nomothetic inductions of collective nostalgia increased domestic country bias (Experiment 1), that collective nostalgia increased domestic country bias across different product categories (Experiment 2), and that collective self-esteem mediated the effect of collective nostalgia on domestic country bias and did so independently of positive affect (Experiment 3). We discuss theoretical and practical implications. (PsycINFO Database Record (c) 2019 APA, all rights reserved)

Recommendations, credits and discounts : essays in behavioral decision making

Thesis (Ph. D.)--Massachusetts Institute of Technology, Sloan School of Management, 2009.Includes bibliographical references.Essay 1: Translation Errors in the Aggregation of Consumer Recommendations There has been a substantial increase of websites providing consumers with recommendations about products and services. These recommendations are usually presented in the form of verbal reviews and numerical ratings. It is assumed implicitly that consumers can integrate adequately the information across the two presentation modes (verbal and numerical). However, research on the effects of compatibility between stimulus and response formats suggests that preference consistency is higher (lower) in cases of compatible (non-compatible) formats, implying that information aggregation across the two modes may be sub-optimal. The results of three experiments confirm this conjecture. Information aggregation and preference reversals were systematically affected by the compatibility of the stimulus and response format. Decision makers were not aware of this effect. Essay 2: The Researcher as a Consumer of Scientific Publications: How Do Name Ordering Conventions Affect Inferences About Contribution Credits? When researchers from different fields with different norms collaborate, the question arises how name ordering conventions are chosen, and how they affect contribution credits. In this paper we answer these questions by studying two disciplines that exemplify the two cornerstones of name ordering conventions: Lexicographical ordering (i.e., alphabetical ordering, endorsed in economics) and non-lexicographical ordering (i.e., ordering according to individual contributions, endorsed in psychology). Inferences about credits are unambiguous in the latter arrangement, but imperfect in the former, because alphabetical listing can reflect ordering according to individual contributions by chance. We contrast the fields of economics and psychology with marketing, a discipline heavily influenced by both.(cont.) Based on archival data, consisting of more than 38,000 journal articles, we show that the three fields have different ordering practices. In two empirical studies, with 351 faculty and graduate student participants from all three disciplines, as well as in a computer simulation, we show that ordering practices systematically affect and shape the allocation of perceived contributions and credit. While strong disciplinary norms in economics and psychology govern the allocation of contribution credits, a more heterogeneous picture emerges for marketing. This lack of strong norms has detrimental effects in terms of assigned contribution credits. Essay 3: Performance-Contingent Discounts and Consumer Choice Incentives affect individuals' attitudes and behaviors in a myriad of ways. In this paper we explore the effects of performance-contingent discounts on consumer choice. For that purpose we set up an online store for digital cameras. Half the subjects received a fixed rebate; the other half had to "earn" their rebate by learning about the products offered. The more information subjects remembered, as inferred from their answers to a short quiz, the higher their discounts. Our results indicate that subjects, who were offered performance-contingent discounts, found the online store more informative and reputable, were more likely to recommend the store to their friends, and were more likely to buy. The results cannot be attributed to a better performance in the quiz or a more thorough exploration of the products offered.by Boris Maciejovsky.Ph.D

Framing effects, selective information and market behavior : an experimental analysis

The results of an asset market experiment, in which 64 subjects trade two assets on eight markets in a computerized continuous double auction, indicate that objectively irrelevant information influences trading behavior. Moreover, positively and negatively framed information leads to a particular trading pattern, but leaves trading prices and trading volume unaffected. In addition, we provide support for the disposition effect. Participants who experience a gain sell their assets more rapidly than participants who experience a loss, and positively framed subjects generally sell their assets later than negatively framed subjects

Translation Errors in the Aggregation of Consumer Recommendations

There has been a substantial increase of websites providing consumers with information about products and services. This information is usually presented in the form of verbal reviews and numerical ratings. It is assumed implicitly that consumers can integrate adequately the information across the two presentation modes (verbal and numerical). Research on compatibility effects between stimulus and response formats, however, suggests that preference consistency is higher (lower) in cases of compatible (noncompatible) formats, implying that information aggregation across the two modes is inefficient. The results of two experiments confirm this conjecture. Decision makers are not aware of this effect. [to cite]

Teams Make You Smarter: Learning and Knowledge Transfer in Auctions and Markets by Teams and Individuals

We study the impact of team decision making on market behavior and its consequences for subsequent individual performance in the Wason selection task, the single-most studied reasoning task. We reformulated the task in terms of "assets" in a market context. Teams of traders learn the task’s solution faster than individuals and achieve this with weaker, less specific, performance feedback. Some teams even perform better than the best individuals. The experience of team decision-making in the market also creates positive knowledge spillovers for post-market individual performance in solving new Wason tasks, implying that team experiences enhance individual problem-solving skills.team decisions, markets, auctions, Wason selection task, rationality

The Effect of Monetary Feedback and Information Spillovers on Cognitive Errors: Evidence from Competitive Markets

Abstract A vast literature shows that individuals frequently violate normative principles in reasoning. In evaluating the relevance of these findings for psychology, economics, and related disciplines, it is natural to ask whether reasoning errors reflect random aberrations or systematic biases. One straightforward way to approach this question is to test their persistence at the aggregate level. In this paper, we report results of four studies designed to determine if information dissemination in competitive auctions can reduce, or even eliminate, logical errors in the Wason selection task. Our results show that payoff feedback and exposure to the information flow drive the aggregate behavior toward the normative solution. We also found evidence of spillover effects from informed to uninformed traders in one-sided combinatorial auctions as well as positive transfer effects from competitive to individual settings. We discuss the implication of our results for future research at the interface of psychology and economics