SITE 2023 Session 4: Psychology and Economics Tue, Aug 8 2023, 9:00am - Wed, Aug 9 2023, 5:00pm PDT John A. and Cynthia Fry Gunn Building, 366 Galvez Street, Stanford, CA 94305
ORGANIZED BY B. Douglas Bernheim, Stanford University, John Beshears, Harvard University, Vincent Crawford, University of Oxford & University of California San Diego, David Laibson, Harvard University, Ulrike Malmendier, University of California Berkeley
This session brings together researchers working on issues at the intersection of psychology and economics. The segment will focus on evidence of and explanations for non-standard choice patterns, as well as the positive and normative implications of those patterns in a wide range of economic decision-making contexts, such as lifecycle consumption and savings, workplace productivity, health, and prosocial behavior. The presentations will frequently build upon insights from other disciplines, including psychology and sociology. Theoretical, empirical, and experimental studies will be included.
Tuesday, August 8, 2023
9:00 AM - 9:30 AM PDT Check-in & Breakfast
AUG 8 9:30 AM - 10:00 AM PDT
Sophisticated Consumers with Inertia: Long-Term Implications from a Large-Scale Field Experiment
Presented by: Navdeep S. Sahni (Stanford University)
Co-author(s): Klaus M. Miller (HEC Paris) and Avner Strulov-Shlain (University of Chicago)
Using a randomized field experiment with a leading European newspaper, we study both the inertia anticipated by consumers and the actual inertia they experience. Our experiment among two million readers varies promotional subscription terms, including whether or not the contract automatically renews to a full-price subscription by default. By analyzing their subscription behavior over two years, we study how consumers respond to inertia-inducing subscription contracts in the short- and long-run. We find strong inertia. Half of the auto-renewal contract takers continue to a full-price subscription while rarely using it. At the same time, consumers preempt their future inertia; 24%-36% of potential subscribers avoid subscribing when offered an auto renewal promo. Further, offering an auto-renewal contract decreases the share of subscribers over the two years after the promo by 10%. Even though auto-renewal generates higher revenue in the medium-run due to payments from inert subscribers, auto-renewal and auto-cancel are revenue equivalent after one year, but with fewer subscribers in auto-renewal. Using a mixed-types model, we estimate that while 70% of consumers are inert, a large majority of them (at least 58%) are aware of their inertia. Our results highlight the importance of sophistication about future biases in the market; sophisticated consumers avoid exploitation and are missed by researchers and firms analyzing only takers, since takers are selected on their na ̈ıvet ́e.
AUG 8 10:00 AM - 10:30 AM PDT
Hedging by Giving: Spiritual Insurance and Religious Donations
Presented by: Yu Zhang (Peking University)
Co-author(s): Yu-Jane Liu (Peking University), Juanjuan Meng (Peking University), and Dalin Sheng (Southwestern University of Finance and Economics)
This paper analyzes donation behaviors from the perspective of religious beliefs. Using a transaction-level dataset from an Asian economy, we show that higher income uncertainty predicts more donations, especially for religious donations, and after negative income uncertainty and health shock. This pattern is inconsistent with existing explanations of donation, but can be explained by a “spiritual insurance” channel, whereby donators believe that giving reduces the probability of the bad state. Indeed, we find that those who donate to non-local religious organizations reduce their insurance purchases, suggesting that “spiritual insurance” channel can be influential for donation and the insurance market.
AUG 8 10:30 AM - 11:00 AM PDT
The Creativity Premium: Exploring the Link Between Childhood Creativity and Life Outcomes
Presented by: Victoria Prowse (Purdue University)
Co-author(s): David Gill (Purdue University)
Success in life increasingly depends on key skills that allow people to thrive in education, the labor market, and their interactions with others. In this paper, we emphasize creativity as a key skill that is essential to open-ended problem solving and resistant to automation. We use rich longitudinal data to study the relationship between people’s creativity measured in childhood and their individual attributes and life outcomes. We find that childhood creativity predicts labor market and educational success: more creative individuals earn more during the course of their careers, work in higher occupational categories, and reach higher levels of educational attainment. Our analysis of attributes further suggests that creative individuals have a package of practical skills that allows them to thrive in work environments where learning from experience is important. We combine insights from our findings with evidence from psychology to propose creativity-improving interventions that could lead to substantial economic benefits.
AUG 8 11:00 AM - 11:30 AM PDT Break
AUG 8 11:30 AM - 12:00 PM PDT
The Dynamics of Networks and Homophily
Presented by: Leeat Yariv (Princeton University)
Co-author(s): Matthew O. Jackson (Stanford University), Stephen M. Nei (University of Exeter), and Erik Snowberg (University of Utah)
We examine friendships and study partnerships among university students over several years. At the aggregate level, connections increase over time, but homophily on gender and ethnicity is relatively constant across time, university residences, and different network layers. At the individual level, homophilous tendencies are persistent across time and network layers. Furthermore, we see assortativity in homophilous tendencies. There is weaker, albeit significant, homophily over malleable characteristics---risk preferences, altruism, study habits, and so on. We find little evidence of assimilation over those characteristics. We also document the nuanced impact of network connections on changes in Grade Point Average.
AUG 8 12:00 PM - 12:30 PM PDT
Strategic Behavior with Tight, Loose and Polarized Norms
Presented by: Eugen Dimant (University of Pennsylvania)
Co-author(s): Michele Gelfand (University of Maryland), Anna Hochleitner (University of Nottingham), and Silvia Sonderegger (University of Nottingham)
Descriptive norms - the behavior of other individuals in one's reference group - play a key role in shaping individual decisions. Organizations are increasingly using information about descriptive norms to nudge positive behavior change. When characterizing peer decisions, a standard approach in the literature is to focus on average behavior. In this paper, we argue both theoretically and empirically that not only averages but also the shape of the whole distribution of behavior can play a crucial role in how people react to descriptive norms. Using a representative sample of the U.S. population, we experimentally investigate how individuals react to strategic environments that are characterized by different distributions of behavior, focusing on the distinction between tight (i.e., characterized by low behavioral variance), loose (i.e., characterized by high behavioral variance), and polarized (i.e., characterized by u-shaped behavior) environments. We find that individuals indeed strongly respond to differences in the variance and shape of the descriptive norm they are facing: loose norms generate greater behavioral variance and polarization generates polarized responses. In polarized environments, most individuals prefer extreme actions -- which expose them to considerable strategic risk -- to intermediate actions that minimize such risk. Furthermore, in polarized and loose environments, personal traits and values play a larger role in determining actual behavior. This provides important insights into how individuals navigate environments that contain strategic uncertainty.
AUG 8 12:30 PM - 2:00 PM PDT Lunch
AUG 8 2:00 PM - 2:30 PM PDT
Empathy, Motivated Reasoning, And Redistribution
Presented by: Tingyan Jia (Stanford University)
I investigate both theoretically and experimentally the economics of empathy and its implications for redistribution. I first define empathy as an accurate simulation of how one would feel if they were in another’s position, distinguishing it from altruism.I propose a novel mechanism by which personal experience affects distributional motives through empathy: wealthy individuals have selfish motivation not to be empathetic towards the poor in order to justify less redistribution; in addition, more varied personal experience of consumption constrains such motivated reasoning, therefore increasing empathy and redistribution. I provide a test of the mechanism in a laboratory setting. I create exogenous variation in experiences and manipulate the timing of information to identify the role of motivated reasoning for subjects with different experiences. I find strong support for the validity of the mechanism: subjects with uniform experience are more susceptible to self-serving motivated reasoning in both their empathy beliefs and redistribution choices.
AUG 8 2:30 PM - 3:00 PM PDT
CEO Social Preferences and Layoffs
Presented by: Marius Guenzel (The Wharton School)
Co-author(s): Clint Hamilton (University of California, Berkeley), and Ulrike Malmendier (University of California, Berkeley)
We study whether CEO social preferences influence firm decision-making with respect to employees, using a new dataset on layoff announcements by U.S. public firms. We first document sizable frictions in firms’ layoff decisions: after exogenous CEO changes, new CEOs make more, and shareholder value-increasing, layoffs. Consistent with a mechanism of social preferences arising through social interactions, CEOs become more reluctant to make layoffs over their tenure as they form more connections inside the firm. This effect is amplified for “difficult-to-implement” layoffs during recessions, near company headquarters, and during the holiday season. Finally, we document a personal cost of firing for CEOs in the form of accelerated long-run mortality.
AUG 8 3:00 PM - 3:30 PM PDT
Understanding Markets with Socially Responsible Consumers
Presented by: Botond Koszegi (Central European University)
Co-author(s): Marc Kaufmann (Central European University)
Many consumers care about climate change and other broad externalities. We model and analyze the market behavior of such “socially responsible consumers,” derive properties of the resulting competitive equilibria, and study the effectiveness of different policies. In violation of price taking, a vanishingly small consumer cares about her impact on the behavior of the rest of the market to a non-vanishing extent. That impact on others endogenously dampens the consumer’s direct effect on the externality, undermining responsible behavior. Dampening implies that even if all consumers value the externality like the social planner, they mitigate too little in any equilibrium, and may coordinate on the worst of multiple equilibria. To motivate consumers to lower the externality in a closed economy, a unit tax is superior to a cap-and-trade system, but there are policies that are better than a tax. Furthermore, under trade with a large or very polluting partner, a cap is better than a tax. When there are two products that are perfect substitutes in consumption but generate different externalities, there is always an equilibrium in which the products have the same price and consumers are indifferent between them. Under conditions we identify, this selfish equilibrium is the unique equilibrium. In a selfish equilibrium, a cap and a unit tax on the dirty product can achieve the same outcomes. In non-selfish equilibria, a proportional subsidy on the clean product dominates both a unit tax and a cap.
AUG 8 3:30 PM - 4:00 PM PDT Break
AUG 8 4:00 PM - 4:30 PM PDT
Complexity and Time
Presented by: Benjamin Enke (Harvard University)
Co-author(s): Thomas Graeber (Harvard University) and Ryan Oprea (University of California, Santa Barbara)
We provide experimental evidence that core intertemporal choice anomalies – including extreme short-run impatience, structural estimates of present bias, hyperbolicity and transitivity violations – are driven by complexity rather than time or risk preferences. First, all anomalies also arise in structurally similar atemporal deci-sion problems involving valuation of iteratively discounted (but immediately paid) rewards. These computational errors are strongly predictive of intertemporal decisions. Second, intertemporal choice anomalies are highly correlated with indices of complexity responses including cognitive uncertainty and choice inconsistency. We show that model misspecification resulting from ignoring behavioral responses to complexity severely inflates structural estimates of present bias.
AUG 8 4:30 PM - 5:00 PM PDT
Cognitive Imprecision and Stake-Dependent Risk Attitudes
Presented by: Michael Woodford (Columbia University)
Co-author(s): Ziang Li (Princeton University) and Mel Win Khaw (Microsoft)
In an experiment that elicits subjects' willingness to pay (WTP) for the outcome of a lottery, we confirm the fourfold pattern of risk attitudes described by Kahneman and Tversky. In addition, we document a systematic effect of stake sizes on the magnitude and sign of the relative risk premium, holding fixed both the probability that a lottery pays off and the sign of its payoff (gain vs. loss). We further show that in our data, there is a log-linear relationship between the monetary payoff of the lottery and WTP, conditional on the probability of the payoff and its sign. We account quantitatively for this relationship, and the way in which it varies with both the probability and sign of the lottery payoff, in a model in which all departures from risk-neutral bidding are attributed to an optimal adaptation of bidding behavior to the presence of cognitive noise. Moreover, the cognitive noise required by our hypothesis is consistent with patterns of bias and variability in judgments about numerical magnitudes and probabilities that have been observed in other contexts.
AUG 8 5:30 PM - 7:30 PM PDT Dinner
Wednesday, August 9, 2023 9:00 AM - 9:30 AM PDT Check-in & Breakfast
AUG 9 9:30 AM - 10:00 AM PDT
Paternalistic Discrimination
Presented by: Nina Caroline Buchmann (Stanford University)
Co-author(s): Carl Meyer (Stanford University) and Colin D. Sullivan (Purdue University)
Women in Bangladesh struggle to access the labor market in general and male-dominated occupations in particular, despite recent progress in education and training. We use a two-sided field experiment to identify paternalistic discrimination: the preferential hiring of male workers to protect female workers from jobs perceived as harmful or difficult. We observe real application and hiring decisions for a night-shift job in Bangladesh and experimentally vary employers’ and candidates’ perceptions of the danger of the job. Improvements to worker safety increase both the supply of and demand for female labor, leading to a compounding increase in female workers. In a behavioral labor model, we demonstrate how other-regarding preferences affect hiring and wages in equilibrium, and we complement the experimental results with survey data to i) analyze the effect of paternalistic discrimination on horizontal and vertical gender segregation in different industries, ii) estimate the degree to which paternalistic preferences restrict women’s labor potential and work readiness, and iii) identify policies that can increase women’s employment across different industries in Bangladesh.
AUG 9 10:00 AM - 10:30 AM PDT
A Memory Model of Belief Formation
Presented by: Maxim Bakhtin (Stanford University)
Co-author(s): Muriel Niederle (Stanford University) and Markus M. Mobius (Microsoft Research)
We model a rational individual who forms beliefs on demand by retrieving observations from the memory database. While she can retrieve data only randomly, she has access to an index that divides the data into two parts, for example, women and men. We show that three effects — importance, variability, and rarity — determine which group is retrieved more under the optimal strategy. Hence although the agent uses Bayes rule to form beliefs, she is biased towards her prior among groups she rationally retrieves fewer data points from. We show that the optimal use of the index leads to rational beliefs that are best described as persistent stereotypes.
AUG 9 10:30 AM - 11:00 AM PDT
Selective Memory Equilibrium
Presented by: Drew Fudenberg (Massachusetts Institute of Technology)
Co-author(s): Giacomo Lanzani (Massachusetts Institute of Technology) and Philipp Strack (Yale University)
We study agents who are more likely to remember some experiences than others, but update beliefs as if the experiences they remember are the only ones that occurred. If the agent’s behavior converges, their limit strategy is a selective memory equilibrium. We illustrate how selective memory equilibrium can be used to understand the long-run effects of several well-documented memory biases. We then extend our analysis to cases where the expected number of recalled experiences is bounded and experiences that are recalled once are more likely to be recalled again. Here we characterize the long-run action frequencies that can arise.
AUG 9 11:00 AM - 11:30 AM PDT Break
AUG 9 11:30 AM - 12:00 PM PDT
Context-dependent Perceptions and Decision Making
Presented by: Keyu Wu (University of Zürich)
All choices are based on information about the available options. A large body of research documents, however, that the same information is often perceived and evaluated differently depending on the prevailing context. Moreover, seemingly identical contextual information, such as previously seen products or job applicants, have been shown to exert opposing influences on perceptions of the same information about a “target” product or job applicant. Inspired by insights from neuroscience and psychophysics, I propose a unifying framework that can parsimoniously reconcile the seemingly contradictory influences of contextual information. This framework generates a novel set of predictions for how properties of the contextual information and the target, such as the perceived uncertainty in both and the perceived discrepancy between them, can be manipulated to affect perceptions and decisions. Because of the generality of perceptual regularities, the framework yields testable implications for a wide range of decision domains, such as the perceived attractiveness of products and services, the evaluation of job applicants, the perceived acceptability of wages, or the perceived trustworthiness of politicians. In addition, based on an experiment on risky investment decisions, I document how decisions can be changed as predicted by the framework through appropriately manipulating several properties of tthe context and the target.
AUG 9
12:00 PM - 12:30 PM PDT
When Do “Nudges” Increase Welfare?
Presented by: Dmitry Taubinsky (University of California, Berkeley)
Co-author(s): Hunt Allcott (Stanford University), Daniel Cohen (Northwestern University), and William Morrison (University of California, Berkeley)
Policymakers are increasingly interested in non-standard policy instruments (NPIs), or “nudges,” such as simplified information disclosure and warning labels. We characterize the welfare effects of NPIs using public finance sufficient statistic approaches, allowing for endogenous prices, market power, and optimal or suboptimal taxes. While many empirical evaluations have focused on whether NPIs increase ostensibly beneficial behaviors on average, we show that this can be a poor guide to welfare. Welfare also depends on whether the NPI reduces the variance of distortions from heterogenous biases and externalities, and the average effect becomes irrelevant with zero pass-through or optimal taxes. We apply our framework to randomized experiments evaluating automotive fuel economy labels and sugary drink health labels. In both experiments, the labels increase ostensibly beneficial behaviors but also may decrease welfare in our model, because they increase the variance of distortions.
AUG 9 12:30 PM - 2:00 PM PDT Lunch
AUG 9 2:00 PM - 2:30 PM PDT
Communicating with Anecdotes
Presented by: Nicole Immorlica (Microsoft Research)
Co-author(s): Nika Haghtalab (University of California, Berkeley), Brendan Lucier (Microsoft Research), Markus Mobius (Microsoft Research), and Divyarthi Mohan (Tel Aviv University)
We study a communication game between a sender and receiver where the sender has access to a set of informative signals about a state of the world. The sender chooses one of her signals and communicates it to the receiver. We call this an “anecdote.” The receiver takes an action. The state of the world and the receiver action are payoff relevant for both the sender and receiver. The sender and receiver are also influenced by a personal preference so that, fixing the state of the world, their preferred receiver action differs. We characterize perfect Bayesian equilibria of this game. The sender faces a temptation to persuade: she is tempted to select a more biased anecdote to influence the receiver’s action. Anecdotes are still informative to the receiver (who will debias at equilibrium) but the attempt to persuade comes at the cost of precision. This gives rise to “informational homophily” where the receiver prefers to listen to like minded senders because they provide higher-precision signals. Furthermore, this leads to a cost of informedness – fixing the personal preferences of the sender, the receiver may prefer a less-informed sender to a more-informed one for certain anecdote distributions.
AUG 9 2:30 PM - 3:00 PM PDT
Complexity, Communication and Misrepresentation
Presented by: Junya Zhou (Purdue University)
Co-author(s): Collin Raymond (Cornell University)
We investigate how increasing the complexity of the message space, in the presence of limited memory, can reduce misrepresentation in strategic communication. We enrich a standard cheap talk game so that senders must communicate not just a payoff-relevant state, but also payoff-irrelevant attributes correlated with the state. We show that: i) increasing the set of attributes that may need to be reported (i.e., the complexity of the game) improves the amount of information transmitted in equilibrium, ii) too much of an increase in complexity leads to a reversal of those gains, iii) limited memory on the part of players, as well as the relative complexity faced by senders and receivers, drives these changes, and iv) individuals experience cognitive costs when dealing with complex environments that they are willing to pay to avoid. Our findings demonstrate that the reporting of redundant information may induce equilibria that feature improved outcomes compared to simpler, more direct reporting systems, and point out the importance of complexity when trying to induce truthful information revelation.
AUG 9 3:00 PM - 3:30 PM PDT
Sequential Cursed Equilibrium
Presented by: Shengwu Li (Harvard University)
Co-author(s): Shani Cohen (Harvard University)
Cursed equilibrium posits that players in a Bayesian game neglect the relationship between their opponent’s actions and their opponent’s type (Eyster and Rabin, 2005). Sequential cursed equilibrium generalizes this idea to extensive games, including those with endogenous private information. It predicts that players neglect the information content of hypothetical events, but make correct inferences from observed events—as is consistent with data from experiments on hypothetical thinking.
AUG 9 3:30 PM - 4:00 PM PDT Break
AUG 9 4:00 PM - 4:30 PM PDT
Evaluating the Evidence of Daily Income Targeting with Experimental and Observational Data
Presented by: Alec Brandon (Johns Hopkins University)
Co-author(s): Colin F. Camerer (California Institute of Technology), John A. List (University of Chicago), Ian Muir (Lyft, Inc.), and Jenny Wang (Massachusetts Institute of Technology)
We evaluate the evidence of daily income targeting by designing and analyzing a field experiment that randomly assigns financial windfalls across thousands of rideshare drivers. Over the year leading up to our windfall experiment, our sample replicates the observational finding that the faster a driver accumulates daily income the earlier they conclude their workdays. However, we find that our windfall treatment, which increases daily income by more than thirty percent, has no detectable effect on the labor supply of our sample. This null effect is estimated precisely enough to reject the effects predicted by the prior evidence and our replications. Heterogeneity analyses also fail to detect a statistically significant effect of the treatment windfall. Revisiting our replications, we find that a more complete measure of daily income and more flexible controls causes higher levels of daily income to no longer coincide with the early conclusion of workdays. The precision of our experimentally estimated nulls and the sensitivity of our replications to alternative specifications call into question much of the evidence of daily income targeting and provide guidance for future research.
AUG 9 4:30 PM - 5:00 PM PDT
Willingness to Accept, Willingness to Pay, and Loss Aversion
Presented by: Erik Snowberg (University of Utah)
Co-author(s): Colin Camerer (California Institute of Technology), Pietro Ortoleva (Princeton University), Mark Dean (Columbia University), and Jonathan Chapman (University of Bologna)
We use four incentivized representative surveys to study the endowment effect for lotteries in 4,000 U.S. adults. We replicate the standard finding of an endowment effect—the divergence between Willingness to Accept (WTA) and Willingness to Pay (WTP), but document three new findings. First, we find little evidence that the endowment effect is related to loss aversion for risky prospects, counter to predictions of popular theories in economics. Second, WTA and WTP not only diverge, but are, at best, weakly correlated. Third, WTA and WTP strongly relate to other aspects of risk preferences. The structure of these behaviors points to different theories of the endowment effect.
AUG 9 5:00 PM - 7:00 PM PDT Dinner
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