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Session 14: Psychology and Economics

Date
Mon, Aug 26 2024, 8:00am - Tue, Aug 27 2024, 9:00pm PDT
Location
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 and University of California San Diego
  • David Laibson, Harvard University
  • Ulrike Malmendier, University of California Berkeley

This session will bring 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. The presentations will build upon insights from other disciplines, including psychology and sociology. Theoretical, empirical, and experimental studies will be included.

In This Session

Monday, August 26, 2024

Aug 26

9:00 am - 10:00 am PDT

Registration Check-In and Breakfast

Aug 26

10:00 am - 10:30 am PDT

Beliefs in a High-Stakes Environment

Presented by: Stephanie W. Wang (University of Pittsburgh)
Yiming Liu (Humboldt University of Berlin and WZB Berlin Social Science Center)

It has been well-documented that people tend to be overconfident. We investigate whether this bias persists in a high-stakes environment by examining whether students are overconfident when predicting their performance on the high school entrance exam. Students in our environment have strong incentives to accurately assess their exam scores because they must submit their school choice before receiving their results under an immediate acceptance mechanism. We find no evidence of overconfidence in score estimation by analyzing administrative and survey data on estimated and actual performance. However, when we remove the high stakes by eliciting students’ recall of their performance in a previous mock exam, they show a strong pattern of overconfidence. Consistent with Benabou and Tirole ́ (2002)’s theory of supplying biased beliefs through biased memory, we find suggestive evidence that students rely on their potentially biased memory of past performance to construct their high-stakes estimation.

Aug 26

10:30 am - 11:00 am PDT

Financing The Next VC-Backed Startup: The Role of Gender

Presented by: Camille Hebert (University of Toronto)
Emmanuel Yimfor (Columbia University) and Heather Tookes (Yale University)

Is there a gender gap in the serial founding of VC-backed startups? We address this question by introducing a new empirical design that exploits differences in future funding outcomes for men and women who co-founded the same startup. We document substantial gender gaps, both on average and following failure or success of the current startup. Following failure, our estimates imply that women are 22.5% less likely to found another VC-backed startup compared to their cofounders who are men. Among those who do found another VC-backed firm, women raise 24.6% less capital. We investigate potential demand- and supply-side drivers of the gap. We rule out lack of interest by women in founding new firms and we do not find evidence of gender differences in founder quality. In fact, the results of an outcome test show no gender difference in the success probabilities of subsequent startups, despite the large funding gap that we document. The gender gaps that we observe appear to be driven by unequal treatment by investors. Our analysis of potential supply-side channels reveals striking negative spillovers following investors’ experiences with other women-founded startups, but no positive spillovers following success of women-founded portfolio firms.

Aug 26

11:00 am - 11:30 am PDT

Break

Aug 26

11:30 am - 12:00 pm PDT

Tradeoffs and Comparison Complexity

Presented by: Jeffrey Yang (Harvard University)
Cassidy Shubatt (Harvard University)

This paper develops a theory of how tradeoffs govern comparison complexity, and how this complexity generates systematic mistakes in choice. In our model, options are easier to compare when they involve less pronounced tradeoffs, in particular when they are 1) more similar feature-by-feature and 2) closer to dominance. These two postulates yield tractable measures of comparison complexity in the domains of multiattribute, lottery, and intertemporal choice. We then show how behavioral regularities in choice and valuation, such as context effects, preference reversals, and apparent probability weighting and hyperbolic discounting in valuations, can be understood as responses to comparison complexity.  We test our model experimentally by varying the strength and nature of tradeoffs. First, we show that our complexity measures predict choice errors, choice inconsistency, and cognitive uncertainty in binary choice data across all three domains. Second, we document that manipulations of comparison complexity can reverse classic behavioral regularities, in line with the predictions of the theory.

Aug 26

12:00 pm - 12:30 pm PDT

Aversion to Complexity, with Applications to Simple Contracts Simple Tax Systems and the Cost of Inflation

Presented by: Xavier Gabaix (Harvard University)

We propose a tractable model of “complexity aversion”. We show how complexity aversion leads to optimally simple mechanisms. We illustrate this in four examples where the traditional model fails to make correct predictions, because it ignores complexity aversion. (i) If complexity aversion is high enough, the price of a good will be constant across time, even though the marginal cost might be variable, to avoid annoying the consumer with a complex price system. (ii) In the theory of optimal taxation, if complexity aversion is high enough, the optimal tax system is “simple”, e.g. just features a uniform tax rate rather than a different tax rate for each good, as recommended by the traditional model. (iii) Whereas the traditional model predicts that contracts should be indexed aggregate factors (e.g. on inflation, GDP, or the stock market), we show how with complexity aversion, the taste for simplicity leads to simple, non-indexed contracts. (iv) Complexity aversion leads to a model of a non-traditional cost of inflation, which we calibrate to be quite important: as different sources of income do not react equally to inflation, higher inflation leads to a more complex planning process. We discuss how using this model of complexity aversion will lead to a useful “behavioral mechanism design” theory, and more realistic—simpler—mechanisms.

Aug 26

12:30 pm - 2:00 pm PDT

Lunch

Aug 26

2:00 pm - 2:30 pm PDT

Preferences for Rights

Presented by: Aviv Caspi (Stanford University)
Julia Gilman (Massachusetts Institute of Technology) and Charlie Rafkin (University of California, Berkeley)

Public discourse about in-kind transfers often appeals to “preferences for rights” — for instance, the “right to health care” or “right to counsel” for indigent legal defense. Preferences for rights are “non-welfarist” if the person values the right per se, holding fixed how the right instrumentally affects others’ utilities. We test for non-welfarist preferences for rights, and their relationship to redistributive choices, with incentivized online experiments (N = 1,800). Participants face choices about allocating rights goods (lawyers, health care) and benchmark goods (bus passes, YMCA memberships) to tenants facing eviction. We implement a share of choices. In two of three experiments, more than half of participants allocate rights goods in ways that are consistent with preferences for rights and dominated if preferences were entirely welfarist. Dominated behaviors are more common with rights goods than benchmarks. In a fourth experiment, those with preferences for rights also exhibit “anti-targeting,” where they redistribute lawyers and health care more universally than benchmark goods to recipients whose incomes differ. At least 26% of participants are non-welfarist, while at most 31% are welfarist.

Aug 26

2:30 pm - 3:00 pm PDT

What You Don’t Know May Hurt You: A Revealed Preferences Approach

Presented by: Gonzalo R. Arrieta (Stanford University)
Lukas Bolte (Carnegie Mellon University)

The dominant approach to welfare is based on revealed preferences and thus is restricted to settings where the individual knows their preferences have been fulfilled. We use a choosing-for-others framework to experimentally study welfare when what the individual believes to be true differs from what is actually true. About 42% of participants see welfare as independent of beliefs; 22% see welfare as only depending on beliefs; and 29% see a lower, but still positive, welfare effect when beliefs are fixed. Furthermore, the average participant values accurate beliefs. Our results suggest most people support the idea that welfare goes beyond awareness, which can inform media regulation, informational policies, and government communication.

Aug 26

3:00 pm - 3:30 pm PDT

Welfare and the Act of Choosing

Presented by: B. Douglas Bernheim (Stanford University)
Kristy Kim (Stanford University) and Dmitry Taubinsky (University of California Berkeley)

The standard revealed-preference approach to welfare economics encounters fundamental difficulties when the act of choosing directly affects welfare through emotions such as guilt, pride, and anxiety. We address this problem by developing an approach that redefines consumption bundles in terms of the sensations they produce, and measures welfare by blending choice-based methods with self-reported well-being techniques. In applications to classic social preferences paradigms, our approach shows that standard revealed-preference methods, including those that exploit choices over menus, mismeasure welfare because preferences depend on choice sets, while self-reported happiness and satisfaction are not sufficient statistics for welfare.

Aug 26

3:30 pm - 4:00 pm PDT

Break

Aug 26

4:00 pm - 4:30 pm PDT

(Beliefs About) Beliefs About the Desire for Help

Presented by: Ania Jaroszewicz (University of California, San Diego)

One simple way of addressing resource inequality is for people with more resources to voluntarily give resources to those with less. Yet many people who are able to help others do not offer help, and many people who need help do not ask. I propose and test one unifying explanation that may contribute to both behaviors. Potential helpers underestimate others’ desire for help (thereby decreasing their willingness to offer), and those in need fail to recognize the potential helpers’ bias (and therefore lack a basis on which to adjust their own behavior in response, for instance by asking more). Across several studies, I document this pattern of beliefs, the behavioral effect, and a mechanism underlying the potential helpers’ bias. Together, the results suggest that incorrect beliefs about others’ desire for help—and incorrect beliefs about beliefs about that desire—may act to limit the amount of help that is transferred between parties, thereby perpetuating inequality.

Aug 26

4:30 pm - 5:00 pm PDT

Like There is No Tomorrow

Presented by: Alejandro Martínez-Marquina (University of Southern California)
Vlasta Rasocha (Stanford University)

Decision problems with multiple periods often require considering future actions when deciding what to do today. We present participants with several two-period consumption/savings problems and compare them with an equivalent one-period version with the same information and possible actions. Participants are 20 p.p. less likely to be optimal in two-period decision problems and, on average, overspend in the first period. The optimality gap is cut in half in decisions that can be correctly solved as myopic one-shot optimization problems. In treatments where subjects must actively seek information, we show that searching behavior fully explains treatment differences. One in four participants in the two-period problem does not search for any information about the second period, effectively behaving like there is no tomorrow. Even those who do search skew their search towards information about the first period.

Aug 26

5:00 pm - 7:00 pm PDT

Dinner

Tuesday, August 27, 2024

Aug 27

9:00 am - 10:00 am PDT

Check-In & Breakfast

Aug 27

10:00 am - 10:30 am PDT

Receiving vs. Believing Misinformation from Friends: Experimental evidence from India

Presented by: Jimmy Narang (University of Southern California)

Do people believe a news story more if it is shared by a friend? Should they? I investigate this using experiments in India with 800 pairs of friends and a custom social-media platform. I find sharers can distinguish true from false stories but share both equally, making sharing uninformative about a story's truth. Receivers, however, interpret sharing as a sign of truth: they overestimate how well sharers’ beliefs predict veracity; discount how factors besides belief influence sharing decisions; and update the most on stories they least believed initially. Altogether, stories gain (unmerited) credibility from being shared by a friendShow less 

Aug 27

10:30 am - 11:00 am PDT

Sorting fact from fiction in a complex world under the shadow of motivated reasoning

Presented by: Melis Kartal (Vienna University of Economics and Business)
Edoardo Cefala (Vienna University of Economics and Business), Sylvia Kritzinger (University of Vienna), and Jean-Robert Tyran (University of Vienna)

We present a comprehensive framework combining theory and a survey-experimental study in Austria, Germany, and the UK to investigate how sorting fact from fiction and updating from news are influenced by cognitive ability, motivated reasoning, and overconfidence in complex topics, such as climate change and science. We predict and find that cognitive ability (i.e., both IQ and education) improves news discernment. The positive effect of cognitive ability is robust and immune to motivated reasoning. In particular, the ability to give correct answers that counter one's existing issue opinions and biases increases in IQ and education. These novel results are good news, suggesting the malleability of news discernment. However, when we disaggregate data by news topic, we find that higher cognitive ability may sometimes boost motivated decision making. Our findings suggest that institutions matter. Trust in institutions reduces the magnitude of motivated reasoning, which likely helps limit opinion polarization in the longer term. On the aggregate, Germany performs better than Austria and the UK in line with our expectation as Germany ranks ahead in prominent rankings of governance.

Aug 27

11:00 am - 11:30 am PDT

Break

Aug 27

11:30 am - 12:00 pm PDT

Are Preconceptions Postconceptions? Evidence on Motivated Political Reasoning

Presented by: Brian Wheaton (University of California, Los Angeles)
Matthew Lilley (Duke University)

How pervasive a phenomenon is motivated political reasoning, and can individuals be de-biased from engaging in it? To answer these questions, we run a survey experiment wherein one treatment group receives an empirical fact plausibly relevant to some normative belief and another treatment group receives this same fact, albeit presented as a hypothetical. The former group is then asked what their actual normative belief is while the latter is asked what their normative beliefs would be if the hypothetical was true. The experiment repeats this structure for a variety of political issues. We find that respondents claim to be quite open-minded, reporting hypothetical normative beliefs quite different from control group beliefs. But when the information is presented as a true fact, respondents’ beliefs are instead statistically indistinguishable from the control group. In other words, despite claiming they would change their minds in response to new facts, respondents do no such thing. We further show that these effects are driven by cases where the fact does not comport with the respondent’s ideology – evidence that the patterns we find do reflect motivated reasoning. Providing the information treatment to individuals who already stated their hypothetical normative beliefs – thereby tying their hands – ameliorates the extent of motivated reasoning on that specific normative question. However, when asked a different but very closely-related normative question instead, motivated reasoning persists undiminished. In a follow-up survey, motivated reasoning returns for the constrained question – though still remains less strong than the unconstrained one. All in all, these results suggest that motivated reasoning is a pervasive and powerful phenomenon.

Aug 27

12:00 pm - 12:30 pm PDT

Habit Formation in Labor Supply

Presented by: Supreet Kaur (University of California, Berkeley)
Luisa Cefala (University of California, Berkeley), Heather Schofield (Cornell University), and Yogita Shamdasani (National University of Singapore)

Economists have long hypothesized the presence of hysteresis in labor supply: transitory labor market shocks may have persistent effects. We examine hysteresis through the lens of habit formation. We undertake a field experiment with casual urban laborers in Chennai, India, where attendance at labor stands provides a revealed preference measure of labor supply. We randomly provide some workers with small financial incentives for attendance over 2 months, leading to a 22% increase in labor supply. We test for habit formation by examining subsequent impacts after the incentives are removed. First, we see a persistent 15% increase in labor supply over the next 2-6 months, resulting in an 11% increase in employment. Second, treated workers exhibit a higher willingness to accept work contracts that are of longer duration and less flexible. They also self-report an increase in automaticity and self- identity around work—suggesting a change in preferences. Third, shocks that temporarily pull workers out of the labor market lead subsequent treatment effects to collapse to zero; in the absence of these shocks, we cannot reject that there is no decay in effects over time. Fourth, in incentivized measures, employers accurately predict treatment effects, and prefer hiring workers who have been treated with a stronger habit stock in the past—findings that have relevance for understanding duration dependence. Finally, in supplementary data from other settings, we replicate short-run persistent effects of transitory labor supply shocks—indicating the broader generalizability of hysteresis in labor supply. Together, our results suggest that the intermittent nature of employment and frequent shocks experienced in low-income settings may inhibit workers from becoming habituated to regular work—with potential implications for absenteeism and labor supply levels.

Aug 27

12:30 pm - 2:00 pm PDT

Lunch

Aug 27

2:00 pm - 2:30 pm PDT

Why Small Firms Fail to Adopt Profitable Opportunities

Presented by: Sean Higgins (Northwestern University)
Paul Gertler (University of California, Berkeley), Ulrike Malmendier (University of California, Berkeley), and Waldo Ojeda (Baruch College)

Firms frequently fail to adopt new profitable opportunities even when frictions such as informational or liquidity constraints are removed. We explore three leading behavioral frictions that have been shown to explain inertia among individuals---present bias, limited memory, and lack of trust---and ask whether they help explain profit-reducing managerial behavior. In partnership with a financial technology (FinTech) payments company in Mexico, we randomly offer 33,978 firms the opportunity to switch to a contract under which they are charged a lower merchant fee. We randomly vary whether there is a deadline, reminder, and advance notice of the reminder, as well as the size of the fee reduction. The deadline does not affect take-up for the larger firms in our sample, which implies limited or no present bias for these firms, but does increase take-up by 8% for smaller firms. Reminders increase take-up by 15%, suggesting a role of memory, and announced reminders by an additional 7%. Survey data reveal trust as the likely mechanism underlying the larger effect of the announced reminder: following through with the pre-announced reminder increases firms' trust and perception of the offer's value.

Aug 27

2:30 pm - 3:00 pm PDT

Categorical Thinking about Interest Rates

Presented by: Richard Townsend (University of California, San Diego)
Kelly Shue (Yale University) and Chen Wang (University of Notre Dame)

Rational expectations imply that the current long-term interest rate should already incorporate public information about anticipated increases in short rates. Yet, there is a widespread misconception that expected future shifts in the short rate forecast corresponding future movements in the long rate. We hypothesize that people lump short- and long-term interest rates into the coarse category of “interest rates,” leading to overestimation of their comovement. We show that categorical thinking about interest rates is evident even among professional forecasters and distorts the real behavior of borrowers and investors. Expectations of rising short rates prompt households and firms to rush to lock in long-term debt before further increases in long rates, reducing the effectiveness of monetary policy. Investors sell long-term bonds because they anticipate future increases in long rates. The increase in supply and decrease in demand for long-term debt cause long rates to overreact to changes in short rates, and can help explain the excess volatility puzzle in long rates.

Aug 27

3:00 pm - 3:30 pm PDT

Behavioral Lock-In: Aggregate Implications of Reference Dependence in the Housing Market

Presented by: Cristian Badarinza (National University of Singapore)
Juhana Siljander (Imperial College London), Tarun Ramadorai (Imperial College London), and Jagdish Tripathy (Bank of England)

Households’ attachment to nominal anchors in the housing market creates aggregate nominal rigidities, with material economic consequences. A new statistic, the prevalence of “paper losses” in the stock of residential properties, captures cross-regional variation in important housing market quantities; the share of properties facing paper losses explains housing transactions volumes more effectively than price growth rates. To rationalize these patterns and study housing-market fiscal policy, we develop and structurally estimate a dynamic search and matching model with reference-dependent agents, rich heterogeneity, and realistic financial constraints. Behavioral frictions dampen the tax elasticity of property prices, and increase the revenue-maximizing level of property taxes.

Aug 27

3:30 pm - 4:00 pm PDT

Break

Aug 27

4:00 pm - 4:30 pm PDT

Negative correlation (gambler’s fallacy) in decisions under uncertainty erodes productivity: Retrospective study and experiment

Presented by: Ivan Png (National University of Singapore)
Song Wang (National University of Singapore)

We examine sequential decision-making in a business setting where uncertain events are exogenous and not confounded by quotas, fairness concerns, learning, or contrast effects. Our research focuses on the decisions of taxi drivers to bid for customer bookings or search for street hail. Bookings yield higher profit, but are subject to cancellation. In retrospective analysis of 9.2 million jobs, we find that, if the previous job was a booking and cancelled, the next job was more likely to be a booking. The findings are consistent with theories that individuals abide by different models of sequences of random events, and that their behavior exhibits reversals. In a lab-in-the-field experiment, we provide the first empirical evidence relating Gambler’s Fallacy beliefs to negative correlation in decisions. Further, we show qualitatively that simply explaining the fallacy can correct the dependence of bidding for a new booking on the outcome of the previous booking.

Aug 27

4:30 pm - 5:00 pm PDT

Beliefs about the Economy are Excessively Sensitive to Household-level Shocks: Evidence from Linked Survey and Administrative Data

Presented by: Chen Lian (University of California, Berkeley)
Luigi Butera (Copenhagen Business School), Matteo Saccarola (University of California, Berkeley), and Dmitry Taubinsky (University of California, Berkeley)

By linking the Danish registry to a survey of consumer expectations, we examine how people’s beliefs about the economy covary with household-level events. We develop formal tests of limited-information rational-expectations (LIRE) and find stark deviations from this Bayesian benchmark. People’s inflation forecasts covary too strongly (and negatively) with both recently realized household income changes and measures of expected future household income changes. Similar results hold for recollections of past inflation (“backcasts”). A series of additional tests suggests that selective recall cued by household-level events is a key mediator for people’s forecast biases.

Aug 27

5:00 pm - 7:00 pm PDT

Dinner