Individual Welfare Maximization

Paper Session

Saturday, Jan. 7, 2017 10:15 AM – 12:15 PM

Hyatt Regency Chicago, Michigan 1A & 1B
Hosted By: American Economic Association
  • Chair: Elias Khalil, Monash University

Asymmetric Naivete: Beliefs About Self-Control

Anastassia Fedyk
,
Harvard University

Abstract

Understanding people's beliefs regarding their own and others' present bias is pivotal in studying interactions between multiple present biased individuals. While several studies document individuals' naïveté about their own present bias, beliefs regarding others remain unexplored. This paper investigates beliefs about one's own and others' present bias within a unified experimental setting, both in the classroom and in the laboratory. First, a classroom survey reveals that students are systematically overconfident about how early they will turn in an assignment, but hold significantly more accurate beliefs about their classmates. Second, in a laboratory experiment, participants engaged in a real effort task are asked to predict their own future behavior and the average behavior of the other participants. Participants making predictions regarding their own decisions provide an estimate of self-awareness, while those making predictions regarding others provide beliefs about the present bias of others. Consistent with the interpretation of naïveté about own present bias as driven by overconfidence, I document a wedge in beliefs regarding self and others: participants display virtually no awareness of their own present bias, but anticipate present bias in others.

Deception and Self-Deception

Peter Schwardmann
,
University of Munich
Joel van der Weele
,
University of Amsterdam

Abstract

Why are people so often overconfident? We conduct an experiment to test the hypothesis that people become overconfident to more effectively persuade or deceive others. After performing a cognitively challenging task, half of our subjects were informed they could earn money by convincing others of their superior performance. The privately elicited beliefs of informed subjects are 50 percent more overconfident and significantly less responsive to objective feedback than the beliefs of subjects in the control condition. Using random variation in confidence generated by our feedback mechanism, we also show that more confident subjects are indeed more persuasive in the ensuing face-to-face interactions.

Street Smart - Economic Decision Making Among Urban Street Dwellers

Niilo Luotonen
,
Aalto University

Abstract

This study provides first field evidence on the effect of financial resources on real economic decisions. A sudden increase in inventory costs tightens consumption budgets in a population of self-employed vendors of a Big Issue-type “street paper”. After the budget shock, vendors become more responsive to expected demand in their stock-up decisions, and increase their inventory turnover. The timing of the behavior changes is consistent with the tightening budget having a causal impact on vendors’ decisions. My findings suggest that binding budget constraints are unlikely to drive the results, indicating that cognition-related factors may be important in explaining the economic decisions of those who have little.

The Friendship Paradox and Systematic Biases in Perceptions and Social Norms

Matthew O. Jackson
,
Stanford University

Abstract

The ``friendship paradox'' (feld1991) states that, on average, people have strictly fewer friends than their friends do. This is an accounting identity that stems from the fact that people with more friends are counted as friends by more people. The point of this paper is that this over-representation of the most popular people in others' samples distorts perceptions of norms and amplifies resulting behaviors to match those perceived norms. I show that there are two things that drive people with more friends to behave more extremely than people with fewer friends and thus to distort the perceived norms. The first is that in any setting with strategic complementarities, people with more friends have more social interaction and hence more complementarity to their actions. The second is that people who have the most innate preference for a given activity form more relationships as they benefit most from the complementarities. As proven here, these two effects lead people with more friends to choose more extreme actions, which in turn feeds back via the friendship paradox to increase overall perceptions of behavior and then via complementarities to amplify average behavior. These theoretical results are consistent with the multitude of studies finding that students (from middle school through university) consistently overestimate peer consumption of alcohol, cigarettes, and drugs. This amplifies students' own behaviors, and can help explain problems with adolescent abuse of drugs and binge-drinking, as well as other behaviors. The analysis explains why policies that simply inform students of actual norms are effective in improving the accuracy of their perceptions and reducing behavior. I also discuss how these results change in cases of strategic substitutes, where individuals overestimate free-riding by peers.

(Mis-)Predicted Subjective Well-Being Following Life Events

Reto Odermatt
,
University of Basel
Alois Stutzer
,
University of Basel

Abstract

The correct prediction of how alternative states of the world affect our lives is a cornerstone
of economics. We study how accurate people are in predicting their future well-being when
facing major life events. Based on individual panel data, we compare people’s forecast of
their life satisfaction in five years’ time to their actual realisations later on. This is done after
the individuals experience widowhood, marriage, unemployment or disability. We find
systematic prediction errors that are at least partly driven by unforeseen adaptation.
JEL Classifications
  • D8 - Information, Knowledge, and Uncertainty