Tilburg Institute for Behavioral Economics Research

Joint Measurement of Risk Aversion, Prudence, and Temperance: A Case for Prospect Theory

We propose a method to jointly measure the intensity of (second-order) risk aversion, prudence (third-order or downside risk aversion), and temperance (fourth-order or outer risk aversion) in laboratory experiments. Our approach is non-parametric and model-independent, and elicits higher-order risk premia with a multiple price list technique. The typical behavioral pattern we observe is risk aversion, prudence, and temperance. Maybe surprisingly, downside risk compensations are significantly larger than those for second-order and outer risk. Results from maximum-likelihood estimations show that commonly used utility functions cannot predict this preference pattern, but cumulative prospect theory can. Since higher-order risk preferences have been almost exclusively studied within expected utility, this result motivates their study in other theories of decision making under risk.

Title: LOAD YOUR GUNS WITH WORDS! WHY TALKING ABOUT NORMS ENHANCES COOPERATION
Punishment is widely considered as a viable tool for sustaining cooperation, but experimental evidence is still controversial. With few exceptions, punishment is experimentally implemented as the imposition of a material economic cost on the recipient. In this talk, I claim that looking at punishment only as the imposition of a cost is an incomplete view and argue that a more insightful understanding of this practice is available once its norm-communicative nature is identified and properly exploited. I present data from laboratory experiments and agent-based simulations that show that the joint use of normative messages and material punishment leads to higher and more stable cooperation and at a lower cost than when used separately.

Adriana Gabriela Breaban

Title: THE DEMAND FOR STRUCTURED PRODUCTS: AN EXPERIMENTAL APPROACH
The guaranteed investment funds presented an important growth in the mutual fund industry. Generalizing we are talking about structured products which secure part of the invested capital and yield additional benefits when the stock market presents a positive evolution. In the present research work, this type of fund’s demand is analyzed making use of the experimental methodology. Different kind of mutual guaranteed funds with certain combinations of secured and additional benefits are offered to the investors vs free risk assets. As the experiment shows that generally the increase of the bond interest entails a decrease of the fund demand, we can say that this indicates the consistency of the results with the risk aversion theory. On the other hand, we can also highlight the existence of atypical behavior: we observe a concave shape of the fund investment as the additional benefit increases along scenarios. This “too good to be true” effect seems to be related with the existence of a reference point, as when we control for order effects, it almost disappears.

The Behavioralist Goes to School: Leveraging Behavioral Economics to Improve Educational Performance

Steven D. Levitt, John A. List, Susanne Neckermann and Sally Sadoff

Decades of research on behavioral economics have established the importance of factors that are typically absent from the standard economic framework: reference dependent preferences, hyperbolic preferences, and the value placed on non-financial rewards. To date, these insights have had little impact on the way the educational system operates. Through a series of field experiments involving thousands of primary and secondary school students, we demonstrate the power of behavioral economics to influence student outcomes. Several insights emerge. First, we find that incentives framed as losses have consistently larger effects than comparable incentives framed as gains. Second, we find that non-financial incentives are considerably more cost-effective than financial incentives for younger students, but were not effective with older students. Finally, and perhaps most importantly, consistent with hyperbolic discounting, all motivating power of the incentives vanishes when rewards are handed out with a delay. Since the rewards to educational investment virtually always come with a delay, our results suggest that the current set of incentives may lead to underinvestment. For policymakers, our findings imply that in the absence of immediate incentives, many students put forth low effort on standardized tests, which may create biases in measures of student ability, teacher value added, school quality, and achievement gaps.