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Decision-Making on Behalf of Others

Paper Session

Sunday, Jan. 6, 2019 10:15 AM - 12:15 PM

Atlanta Marriott Marquis, International C
Hosted By: American Economic Association
  • Chair: Homa Zarghamee, Barnard College

Behavioral Economic Phenomena in Decision-Making for Others

John Ifcher
,
Santa Clara University
Homa Zarghamee
,
Barnard College

Abstract

We examine whether biases identified in the behavioral-economics literature apply to decisions made for others (DMfO). The economics literature has mostly considered DMfO in the contexts of principal-agent models or altruistic (e.g., parent-child) frameworks, while the psychology literature often conflates such decisions with advice or predictions of others’ behavior. We conduct a laboratory experiment in which subjects make decision on behalf of themselves and others in seven tasks that measure the following behavioral-economic phenomena: present-bias, reflection effect, ambiguity aversion, decoy effect, endowment effect, anchoring and adjustment, and identifiable victim effect. We find that, in DMfO as compared to self-decisions charitable contributions are significantly higher in the identifiable-vitctim-effect task and willingness-to-pay is higher in both the endowment-effect and anchoring-and-adjustment tasks; higher willingness-to-pay significantly reduces the endowment effect in DMfO as compared to self-decisions. We find substantial order effects, with subjects treating DMfO more like self-decisions when self-decisions are made first. In a subsequent survey, subjects report how they approached DMfO versus self-decisions; results are mediated by these approaches.

Equity Concerns are Narrowly Framed

Christine Exley
,
Harvard Business Shool
Judd Kessler
,
University of Pennsylvania

Abstract

We show that individuals narrowly bracket their equity concerns. Across four experiments including 1,600 subjects, individuals equalize components of payoffs rather than overall payoffs. When earnings are comprised of "small tokens" worth 1 cent and "large tokens" worth 2 cents, subjects frequently equalize the distribution of small (or large) tokens rather than equalizing total earnings. When payoffs are comprised of time and money, subjects similarly equalize the distribution of time (or money) rather than total payoffs. In addition, subjects are more likely to equalize time than money. These findings can help explain a variety of behavioral phenomena including the structure of social insurance programs, patterns of public good provision, and why transactions that turn money into time are often deemed repugnant.

Investing for Others: Principals’ vs. Agents’ Preferences

Stefan T. Trautmann
,
University of Heidelberg
Christian König Kersting
,
University of Heidelberg
Luisa Kling
,
University of Heidelberg

Abstract

We study a typical financial advice setting, in which financial agents make the de facto investment decisions for their principals. The relevant literature poses an unspoken but often insinuated question: What is the main driving factor of an agent’s risky investment decision for the principal? Is it the agent’s own preference or is it the principal’s? In a laboratory experiment with a 2-by-3 between-subject design, we vary the number of principals each agent takes a decision for, and employ three different payment schemes for the agents (fix, portfolio share, profit share). In the first part of our experiment, participants individually and privately map a set of five investment strategies, which range in wording from “very conservative” to “aggressive”, to investment shares into a risky asset. The terms used to describe the strategies are commonly used in financial advisory documents. In the second part, participants take a Gneezy-Potters (1997, QJE) investment decision: Principals choose one of the five investment strategies which is subsequently communicated to their financial agent. Knowing their principals’ preferred ‘verbal’ strategies, financial agents then decide how much of their principals’ endowments to invest in the risky asset. We assess i) whether agents’ choices are affected by their own risk attitude, ii) whether they differentiate between principals with different preferences, and iii) how decision-making is affected by different payment schemes. Initially collecting the individual mappings of investment strategies into risky investment shares allows us to control for mismatches in the perception of the investment strategies between principals and agents.

The Effect of Feedback Content and Timing on Self-Other Gap in Risk-Taking

Natalie Lee
,
New York University

Abstract

Previous experiments on delegated decision making find seemingly contradictory results: some experiments find that people take greater risks when they decide for others than for themselves, while other experiments find the opposite. I hypothesize that these mixed conclusions are the result of the type and the timing of feedback provided to subjects and conduct an experiment to identify these causes. In a choice between two binary lotteries, subjects either learn the outcome of only the chosen lottery or the outcome for both the chosen and the unchosen lottery. Feedback is provided immediately after each decision or after a sequence of ten decisions. I find that when subjects receive immediate feedback on the outcome of both the chosen and the unchosen options, they make a risky shift. That is, subjects take greater risks for others than for themselves. If I alter either the timing or the content of feedback, the risky shift disappears. If I alter both the timing and the content of feedback so that the feedback is given at the end, only on the outcome of the chosen option, I find a risky shift again. These findings reconcile the contradictory results in the previous studies. I present a theoretical model and analyze how subjects' risk-taking behavior evolves as they make more decisions.
Discussant(s)
Joshua Miller
,
University of Alicante
Angela de Oliveira
,
University of Massachusetts-Amherst
Sandro Ambuehl
,
University of Toronto
John Ifcher
,
Santa Clara University
JEL Classifications
  • D9 - Micro-Based Behavioral Economics
  • D7 - Analysis of Collective Decision-Making