Social Reference Points and Risk Taking

We test whether social reference points impact individual risk taking. In a laboratory experiment, decision makers observe the earnings of a peer subject before making a risky choice. We exogenously manipulate the peer earnings across two treatments. We find a significant treatment effect on risk taking: decision makers vary their risk taking in order to surpass or stay ahead of their peer. Our findings are consistent with a social-comparison-based, reference-dependent preference model that formalizes relative concerns via social loss aversion. Additionally, we relate our findings to the impact of private reference points on risk taking

Social Reference Points and Risk Taking

This study test whether social reference points impact individual risk taking. In a laboratory experiment, decision makers observe the earnings of a peer subject before making a risky choice. We exogenously manipulate the peer earnings across two treatments. We find a significant treatment effect on risk taking: decision makers vary their risk taking in order to surpass or stay ahead of their peer. Our findings are consistent with a social-comparison-based, reference-dependent preference model that formalizes relative concerns via social loss aversion. Additionally, we relate our findings to the impact of private reference points on risk taking

Essays in Behavioral and Experimental Economics

Behavioral economics has improved the understanding of economic phenomena by enriching the understanding of economic decision making with insights from psychology, sociology, and anthropology. Rigorous empirical investigations of individual behavior---which commonly involve the use of laboratory experiments---have been at the heart of behavioral economics and have lead to new theoretical accounts of decision making. The following three insights gave rise to influential branches of behavioral economics. First, the context in which individuals make decisions often unleash behavioral influences that go beyond those identified by standard economic theory. In particular, individual preferences commonly depend on contextual features, as has been highlighted by the literatures on reference-dependent preferences, and default effects. Second, individuals' perception and processing of information often does not live up to the high demands of standard economic theory. Instead, individuals seem to employ simple heuristics and attention-based decision rules in complex environments. Third, while standard economic theory typically constrains individuals' motives to pure self-interest, a more comprehensive view on individuals' behavior in social interactions uncovers that individuals often care directly about the well-being of others as well as about how they are viewed and treated by others. This thesis consists of three essays that each contribute to one of these three building blocks of research in behavioral economics. In my first essay, I investigate the consequences of social reference points for decision making under risk in a series of laboratory experiments. In the main experiment, decision makers observe the predetermined earnings of peer subjects before making a risky choice. I exogenously manipulate peers' earnings and find a significant treatment effect: decision makers make riskier choices in case of larger peers' earnings. The treatment effect is consistent with the predictions of a model featuring social-comparison--based reference points and loss aversion. In two control experiments, I demonstrate that nonsocial---e.g., expectations-based---reference points do not explain the treatment effect. In my second essay, I present novel results on individuals' intertemporal choices. The findings cannot be explained by exponential and hyperbolic discounting, the canonical approaches to intertemporal decision making in economics, but are consistent with an attention-based approach to intertemporal decision making that is based on concentration bias. In particular, the essay provides causal evidence from novel lab experiments that intertemporal choices are systematically affected by whether consequences of intertemporal choice are concentrated in few or dispersed over multiple periods: (i) Individuals are less patient in the case that the advantages of patient behavior are dispersed over many future periods than when they are concentrated in a single future period. (ii) Individuals are more patient in the case that the disadvantages of patient behavior are dispersed over multiple earlier periods than when they are concentrated in a single earlier period. Both findings demonstrate concentration bias in individuals' intertemporal choices. Our results are in line with recent theoretical models of attention-based decision rules. In my third essay, I study whether prior experience of unfair versus fair treatment affects how much individuals trust others. The essay provides causal evidence that trust is affected by prior personal experience of fair versus unfair treatment by an unrelated third party. I compare the willingness to trust of subjects in a lab experiment after they experienced either being paid or not being paid for a real-effort task by a peer subject. After being paid, subjects' willingness to trust is substantially higher relative to subjects who were not paid previously. Importantly, this treatment effect holds despite the fact that subjects knew the exact frequency with which subjects overall got paid or did not get paid, such that the personal experience of fair versus unfair treatment did not provide additional information regarding the subsequent interaction. Rational learning hence cannot explain the treatment effect on trust. By employing a control experiment, we show that the effect of experiencing fair versus unfair treatment on trust does also not result from income effects: when subjects were paid based on a coin toss, subjects' willingness to trust was similar to subjects who where not paid based on a coin toss

Memory and representativeness

We explore the idea that judgment by representativeness reflects the workings of episodic memory, especially interference. In a new laboratory experiment on cued recall, participants are shown two groups of images with different distributions of colors. We find that i) decreasing the frequency of a given color in one group significantly increases the recalled frequency of that color in the other group, ii) for a fixed set of images, different cues for the same objective distribution entail different interference patterns and different probabilistic assessments. Selective retrieval and interference may offer a foundation for the representativeness heuristic, but more generally for understanding the formation of probability judgments from experienced statistical associations

Determinants of trust: The role of personal experiences

Social interactions pervade daily life and thereby create an abundance of social experiences. Such personal experiences likely shape what we believe and who we are. In this paper, we ask if and how personal experiences from social interactions determine individuals' inclination to trust others? In a laboratory experiment, we manipulate social experiences prior to measuring participants' willingness to trust others. We contrast this situation with a non-social control condition where we keep all aspects of the prior experiences identical, except that we remove the social dimension. Subjects' willingness to trust is substantially higher after a positive social experience relative to a negative social experience. No such effect is obtained in the non-social control condition. Our results cannot be explained by rational learning as well as income and reference point effects. Delving into the underlying mechanisms, we provide evidence that non-standard belief patterns are an important driver of experience effects. (C) 2020 Elsevier Inc. All rights reserved

Associative Memory and Belief Formation

This paper experimentally studies the role of associative memory for belief formation. Real-world information signals are often embedded in memorable contexts. Thus, today’s news, and the contexts they are embedded in, may cue the selective retrieval of similar past news and hence contribute to the widely documented pattern of expectation overreaction. Based on a stylized version of models of associative memory in the literature, we develop a simple and tightly controlled experimental setup in which participants observe sequences of news about the stock market value of hypothetical companies. Here, identical types of news are associated with identical stories and images. In this setup, participants’ expectations strongly overreact to recent news. We successfully verify the model’s predictions about how the magnitude of overreaction should depend on the history of news. For example, once today’s news are associated with the stories and images of previous opposite news, expectations systematically underreact. By exogenously manipulating the scope for imperfect and associative recall in our setup, we further provide direct causal evidence for the role of memory in belief formation and overreaction. Finally, we use our experimental data to estimate the model parameters that govern the strength of imperfect and associative recall over different time horizons

Memory and Representativeness

We explore the idea that judgment by representativeness reflects the workings of memory. In our model, the probability of a hypothesis conditional on data increases in the ease with which instances of that hypothesis are retrieved when cued with the data. Retrieval is driven by a measure of similarity which exhibits contextual interference: a data/cue is less likely to retrieve instances of a hypothesis that occurs frequently in other data. As a result, probability assessments are context dependent. In a new laboratory experiment, participants are shown two groups of images with different distributions of colors and other features. In line with the model's predictions, we find that (a) decreasing the frequency of a given color in one group significantly increases the recalled frequency of that color in the other group; and (b) cueing different features for the same set of images entails different probabilistic assessments, even if the features are normatively irrelevant. A calibration of the model yields a good quantitative fit with the data, highlighting the central role of contextual interference