Article
To read the full-text of this research, you can request a copy directly from the authors.

Abstract

Life-cycle models of labor supply predict a positive relationship between hours supplied and transitory changes in wages. We tested this prediction using three samples of wages and hours of New York City cabdrivers, whose wages are correlated within days but uncorrelated between days. Estimated wage elasticities are significantly negative in two out of three samples. Elasticities of inexperienced drivers average approximately −1 and are less than zero in all three samples (and significantly less than for experienced drivers in two of three samples). Our interpretation of these findings is that cabdrivers (at least inexperienced ones): (i) make labor supply decisions “one day at a time” instead of intertemporally substituting labor and leisure across multiple days, and (ii) set a loose daily income target and quit working once they reach that target.

No full-text available

Request Full-text Paper PDF

To read the full-text of this research,
you can request a copy directly from the authors.

... For this we will discuss following three models and will also observe their empirical analysis with the real-world data. The three models are by: Camerer et al. [9], Farber [10] and Crawford et al. [11]. In the model by Camerer et al. [9] they have tried to figure out and analyses the positive relationship between changes in wages and number of hours spent. ...
... The three models are by: Camerer et al. [9], Farber [10] and Crawford et al. [11]. In the model by Camerer et al. [9] they have tried to figure out and analyses the positive relationship between changes in wages and number of hours spent. They also tried to analyze and understand the elasticities of cab drivers. ...
... Camerer et al. (1997) [9] have done extensive research to find the relationship between daily working hours and wages of New York cab drivers. In his model of labor supply, it has been assumed that the cab drivers take the cabs on lease for a particular amount of time or day with a fixed fee. ...
Article
Full-text available
This article presents a brief analysis of labor supply decision models using the concept of reference-dependent preference. This reference-dependent preference leads the model towards a behavioral aspect where "Gain-Loss utility" can be derived from standard "consumption utility" and the reference point is determined endogenously by the economic environment. At the first two sections of the article labor supply decision and reference-dependent preference has been discussed in a brief. Then three model has been discussed where the economists used the concept of reference-dependent preference to make labor supply model decisions.
... Camerer et al. [35] study a well-known scenario on labor supply: New York cabdriver's willingness-to-work. Workers in this type of employment have flexible self-determined work time. ...
... Cabdrivers are reluctant to continue working because they will surely experience disappointment for any wage level in the afternoon once α is large enough. It replicates the first part of Koszegi and Rabin's [31] predictions and resembles [39,40] and [35]. On the other hand, the exceptionally high wage contributes to a high aspiration level that workers use to perceive their happiness in the afternoon. ...
... Using the WB model to analyze labor-supply decisions is based on the perception of payoffs under certain behavioral assumptions. Unlike [31] and [35], we focus on the indirect relationship between payoffs and efforts, in which the feeling of happiness (or disappointment) serves as an intermediary. The endogenous factors μ and α associated with personal characteristics are determinant of experiencing happiness. ...
Article
Full-text available
The origin of happiness arouses people’s curiosity for a long time. Recent research introduces a utility theory for measuring subjective happiness in a social context. The past recent monetary conditions influence the present subjective happiness through two distinct channels: interpersonal comparison and self-adaptation. In this paper, we develop this theory to analyze behavioral patterns. Together with prospect theory’s gain-loss utility function, we exploit the theory in predicting psychological phenomena of craving. We explore the relationships between happiness and earnings. Under certain conditions, a high payoff disappoints you immediately and even leads to continuous disappointment across periods. We extend the explanations of the scenarios of New York cabdrivers’ labor-supply decisions. The effect of social comparisons may trigger workers’ behaviors of quit-working, which deepen related understandings of the literature.
... Reference-dependent models have played an important role in empirical analyses of workers', consumers', and investors' choice behavior since Camerer, Babcock, Loewenstein, and Thaler's (1997) Experiments suggest that most people are loss-averse-more sensitive to changes below their targets (losses) than above them (gains). Loss aversion creates a kink that makes a driver's daily earnings tend to bunch around his earnings target, thus working less on days with high "wages". ...
... Our analysis shows that reference-dependent preferences can make it possible to rationalize some choice behavior that violates GARP, depending on two factors: (i) whether sensitivity is constant as Farber (2005Farber ( , 2008, Crawford and Meng (2011), and sometimes Kőszegi and Rabin (2006) assume, or variable;and (ii) whether reference points are unobservable and unmodelable as Camerer et al. (1997) ...
... We consider whether reference-dependent preferences can rationalize a finite set of consumer demand observations for a single consumer-or equivalently a group of consumers assumed to have homogeneous preferences as in Camerer et al. (1997), Farber (2005Farber ( , 2008, and Crawford and Meng (2011), but we will speak of a single consumer. Index goods k = 1,…, K. ...
Preprint
Full-text available
We derive nonparametric sufficient and asymptotically necessary conditions for the existence of reference-dependent preferences, as in Kőszegi and Rabin's (2006) structural implementation of Kahneman and Tversky's (1979) prospect theory, that can rationalize some consumer demand choices that violate the conditions for a neoclassical rationalization. Our conditions relax Kőszegi and Rabin's and others' assumption of additive separability across goods. Unless prospect theory's notion of sensitivity is constant and reference points are precisely modelable or observable, the hypothesis of reference-dependent preferences has few or no nonparametrically refutable implications. But with constant sensitivity and modelable reference points, the model has useful implications. For almost all of Farber's (2005, 2008) cabdrivers, models that relax additive separability across goods have higher measures of predictive success (Selten and Krischker 1983) than their additively separable counterparts. For roughly half of the drivers, reference-dependent models that relax additive separability have higher Selten measures than their neoclassical counterparts.
... Since 1997, five papers debating the labor supply elasticity of New York City cab drivers have been published in top 5 economics journals. Camerer et al. (1997) and Crawford and Meng (2011) find that unanticipated wage elasticity is negative and propose a reference-dependent model, whereas Farber (2005Farber ( , 2008Farber ( , 2015 finds that labor hours respond positively to unanticipated wages and insists on a neoclassical intertemporal model. In his latest paper, Farber (2015) uses an instrumental variable (IV) approach to show that cab drivers respond positively to unanticipated wage shocks. ...
... However, the empirical analysis of intertemporal substitution often finds small and statistically insignificant, and sometimes even negative elasticities (Blundell and Macurdy 1999) because this analysis has difficulties considering that workers may not be able to choose working hours freely and that the wage change may not be transitory. Camerer et al. (1997) analyze the daily labor behavior of New York City taxi drivers. These cab drivers are ideal targets to study labor supply estimation because their wage changes are transitory and they can adjust their labor supply freely. ...
Preprint
Full-text available
This paper finds that unanticipated wage elasticity of New York cab drivers is negative when controlling for measurement error and division bias. Moreover, after providing theoretical and empirical evidence showing that Farber's (2015 Quarterly Journal of Economics) instrumental variable (IV) approach is inconsistent, I propose a new IV that yields negative elasticity. In addition, I find that the elasticity becomes more negative as cab driver experience grows. Although negative elasticity is consistent with reference-dependent preferences, I propose an approach based on the neoclassical intertemporal model in which unanticipated elasticity is negative.
... Second, by analyzing driver behavior in response to COVID-19, we add to the literature on labor supply in the taxi industry and more recently, in the ride-sharing industry. In the taxi industry, it has been demonstrated that drivers exhibit reference-dependent preferences (Camerer et al., 1997;Crawford and Meng, 2011), respond positively to both unanticipated and anticipated increases in earnings opportunities (Farber, 2015), strategically respond to surge pricing (Cachon et al., 2017;Castillo, 2020;Miao et al., 2021), overtreat passengers under a usage-based pricing scheme (Miao and Chu, 2020), and are strategic in location choices (Buchholz, 2017). In the ride-sharing industry, prior research has demonstrated flexibility in driver schedule and labor supply (Hall and Krueger, 2016;Chen et al., 2019), and the effect of external incentives (Allon et al., 2018;Brodeur and Nield, 2018). ...
... It is ambiguous ex-ante how the number of new cases affects a driver's shift decision. On the one hand, more new cases may increase the risk of infection, which decease drivers' expected wellbeing, and therefore discourage drivers from working on a specific day; on the other hand, fewer drivers on the street suggest less competition among drivers and therefore higher chances of getting a passenger and potentially higher hourly earnings, which may motivate drivers to work (Camerer et al., 1997). It is important for the ride-sharing company to understand how the severity of COVID-19 affects drivers' willingness to work, so that the company can adjust their stimulus plans for drivers accordingly. ...
Article
The COVID-19 pandemic has brought unprecedented disruptions to many industries, and the transportation industry is among the most disrupted ones. We seek to address, in the context of a ride-sharing platform, the response of drivers to the pandemic and the post-pandemic recovery. We collected comprehensive trip data from one of the leading ride-sharing companies in China from September 2019 to August 2020, which cover pre-, during-, and post-pandemic phases in three major Chinese cities, and investigate the causal effect of the COVID-19 pandemic on driver behavior. We find that drivers only slightly reduced their shift decision in response to increased COVID-19 cases, likely because they have to make a living from providing ride-sharing services. Nevertheless, conditional on working, drivers exhibit strong risk aversion: As the number of new cases increases, drivers strategically adjust the scope of search for passengers, complete fewer trips, and as a result, make lower daily earnings. Finally, our heterogeneity analyses indicate that the effects appear to vary both across drivers and over time, with generally stronger effects on drivers who are older, more experienced, more active before the pandemic, and with higher status within the firm. Our findings have strong policy implications: These drivers tend to contribute more to the focal company, and also rely more on providing ride-sharing services to make a living. Therefore, they should be prioritized in stimulus plans offered by the government or the ride-sharing company.
... Resultantly, it is critical to have available econometric 1 Section 2 gives a non-exhaustive list of empirical examples. 2 In another example, Camerer, Babcock, Loewenstein, and Thaler (1997) finds clear empirical evidence that New York City cab drivers have a negative elasticity of hours worked with respect to the daily wage. This phenomenon is hard to rationalize with broadly bracketing agents. ...
... We also contribute to the literature on choice bracketing. 6 This literature is mainly theoretical and experimental (Rabin and Weizsäcker, 2009;Read, Loewenstein, and Rabin, 1999;Thaler, 1999), with some descriptive rather than structural applications (Camerer, Babcock, Loewenstein, and Thaler, 1997). 7 We contribute to this literature by providing an econometric framework in which researchers can estimate the extent of broad versus narrow bracketing and test for broad bracketing in decision-making by jointly testing if the thresholds in the latent space form a lattice model. ...
Preprint
We introduce multivariate ordered discrete response models that exhibit non-lattice structures. From the perspective of behavioral economics, these models correspond to broad bracketing in decision making, whereas lattice models, which researchers typically estimate in practice, correspond to narrow bracketing. There is also a class of hierarchical models, which nests lattice models and is a special case of non-lattice models. Hierarchical models correspond to sequential decision making and can be represented by binary decision trees. In each of these cases, we specify latent processes as a sum of an index of covariates and an unobserved error, with unobservables for different latent processes potentially correlated. This additional dependence further complicates the identification of model parameters in non-lattice models. We give conditions sufficient to guarantee identification under the independence of errors and covariates, compare these conditions to what is required to attain identification in lattice models and outline an estimation approach. Finally, we provide simulations and empirical examples, through which we discuss the case when unobservables follow a distribution from a known parametric family, focusing on popular probit specifications.
... Prospect theory [28,[54][55][56][57] is an experimentally-grounded behavioral model of how people make decisions under risk. Prospect theory has been successfully applied to various different areas of economics, and it has proven a useful model both for explaining observed behaviors [7,10,14,25,33,34,39,49,50] and for prescriptively nudging people towards higherutility choices [21,26,35,53]. ...
... More than 40 years later, prospect theory is still widely viewed as the best available model for how people make decisions in the presence of risk. It has been applied as a [6,16,39,49], insurance [7,27,33,51], savings [34], price setting [25], labor supply [10,14], and betting markets [50]. Within the domain of computer science, prospect theory has been applied to explain decisions relating to investment in security [48,60], adoption of two-factor authentication [43], and disclosure of personal information [3,4,24]. ...
Preprint
Full-text available
User-chosen passwords remain essential to online security, and yet people continue to choose weak, insecure passwords. In this work, we investigate whether prospect theory, a behavioral model of how people evaluate risk, can provide insights into how users choose passwords and whether it can motivate new designs for password selection mechanisms that will nudge users to select stronger passwords. We ran a user study with 762 participants, and we found that an intervention guided by prospect theory -- which leverages the reference-dependence effect by framing selecting weak passwords as a loss relative to choosing a stronger password -- causes approximately 25% of users to improve the strength of their password (significantly more than alternative interventions) and reduced the final number of weak passwords by approximately 25%. We also evaluate the relation between user behavior and users' mental models of hacking and password attacks. These results provide guidance for designing and implementing account registration mechanisms that will significantly improve the strength of user-selected passwords, thereby leveraging insights from prospect theory to improve the security of systems that use password-based authentication.
... The evidence in support of behavioral economic theories among producers is almost exclusively non-experimental (e.g., Beggs and Graddy, 2009;Camerer et al., 1997;Coval and Shumway, 2005;Gao et al., 2018;McAlvanah and Moul, 2013). We discuss the limitations of this non-experimental literature and the need for experimental evidence in the following section. ...
... However, these auctioneer effects are inferred from regression coefficient estimates on auctioneer dummy variables, which may also capture unobserved heterogeneity in the auction contexts associated with different auctioneers. In a similar example, Farber, 2015 reexamines the work of Camerer et al., 1997 on New York taxi drivers' labor supply decisions being reference dependent. Using the complete 6 record of all trips taken by NYC taxi drivers between 2009 and 2013, Farber, 2015 finds little evidence of reference dependence and concludes that the results are consistent with neoclassical optimization models of labor supply. ...
Article
Full-text available
Experimental research in behavioral economics focuses on consumer behaviors. Similar experimental research on profit-maximizing producers is rare. In three field experiments involving commercial agricultural producers in the US, we detect evidence of anchoring in competitive auctions for conservation contracts related to nutrient and pest management that were worth, on average, nearly nine thousand dollars. In these auctions, the value of the starting cost-share bid was randomized to be either 0% or 100%. When the starting value was 100%, final bids were 46% higher, on average. We find weak evidence that experience with conservation contracts may modestly attenuate the anchoring effect.
... 10 Our contribution thus analyzes these preferences by using prospect theory, even if Barberisis (2013) underlines that this theory is not easy to apply, but when it can be applied, it can explain the data better than EU. Most applications have used reference dependence in conjunction with loss aversion, as Barberis et al. (2001) or Barberis et al. (2016) in behavioral finance, Camerer et al. (1997), Farber (2008 or Crawford and Meng (2011) in labor economics for explaining why cabdrivers drive too much the bad days and stop working too soon the good ones, or in sport where the reference point can be the par in golf (Pope and Schweitzer (2011)), or a round time for a marathon (Allen et al. (2017)). ...
... However, the use of loss aversion and dependence on reference points has evolved well beyond its initial application. Applications include nancial asset prices (Barberis, 2013), the equity premium puzzle (Benartzi and Thaler, 1995), labor supply decisions (Camerer et al., 1997), political power of entitlements change (Romer, 1996), majority voting and politics (Alesina and Passarelli, 2019), sectoral trade policy behavior , and selling-buying price endowment eects in contingent valuation of nontraded goods (Ericson and Fuster, 2014;Tunçel and Hammitt, 2014). Loss aversion also features prominently in behavioral industrial organization, in theories and evidence of responses to price changes (Heidhues and Kőszegi, 2018). ...
... As this work does not incorporate reference-dependent utility or income targeting models, it assumes that profit-maximization is always compatible with the individual utility maximization of drivers. The inclusion of income reference points in further research on incentive contracting would refine the analysis of drivers' labor supply [Schlüter et al., 2020;Camerer et al., 1997]. ...
Article
Full-text available
The rapidly growing city of Kigali has a bus network that is undergoing increased development as underlined in its Transport Master Plan. Two schemes of bus driver remuneration coexist in the city: One constitutes a hybrid salary and commission system, while the other pays a fixed monthly salary. This paper examines the effect of these differing compensation schemes on driver behavior in Kigali using survey data from 2019. The analysis applies linear models incorporating various aspects of driver behavior in a principal-agent framework. The results indicate that the performance-based compensation scheme is associated with higher per-trip passenger fluctuation and faster driving (possibly due to drivers aiming to accrue a higher income) compared to the fixed-wage system. Policy implications comprise the inclusion of further criteria in incentive contracts to internalize potential negative externalities on society, e.g., to hinder the endangerment of passenger safety by appropriately incentivizing drivers. In conclusion, bus drivers who are compensated by performance are more likely to alter their behavior, responding to the incentive scheme through several channels.
... However, the role of the online ride-hailing service mode in terms of innovation and the impact the service mode brings remains debatable. Many people consider that it has brought about "disruptive" changes [1,2], while others argue that the disruptor should be a continuous innovator seeking to expand the market and improve traditional taxi services, ...
Article
Full-text available
Online ride-hailing services, which are characterized by online matching, are generally considered improving the work efficiency of taxi drivers and bring disruptive changes to the taxi market. We use the historical and contemporaneous trip-level big data of Shanghai online ride-hailing drivers and traditional cruising taxi drivers, structure the data into shift and hour levels, and compare the two types in terms of efficiency. The comparison results indicate that the overall capacity utilization rate of online ride-hailing drivers is slightly higher than that of cruising taxi drivers, but it is mainly driven by part-time drivers. We confirm the role of flexible work and market scale in improving capacity utilization, but do not find the impact of online matching mechanisms. From the perspective of the drivers’ work efficiency, the similar capacity utilization of the two types of full-time workers is consistent with Cramer and Krueger’s (2016) evidence in New York. Online matching and street searching achieve almost equal efficiency in densely populated urban areas. However, from the perspective of supply and demand matching, online ride-hailing creates a more flexible supply and is more adaptable to the changes in demand, which improves the overall taxi market efficiency.
... This, however, would entail significant estimation difficulties. Our definition is in line with the idea that participants have a "target income" at any point in time (see, e.g., Camerer et al. 1997;Crawford and Meng 2011). 12 It should also be acknowledged that this is not a standard regret aversion function that has one reference point and two parameters like in Bell (1982) and Loomes and Sugden (1982). ...
... K&T ont toutefois argumenté en faveur d'un point de référence égal à la richesse actuelle. Ils appellent ce référentiel : le statu-quo et le choisissent pour deux raisons : 1) Par commodité pour simplifier les équations et 2) Car ils estiment que la plupart du temps c'est probablement ce référentiel qui est utilisé par les individus comme semble le démontrer leur paradoxe présenté dans ce chapitre à la section 1. (Fiegenbaum & Thomas, 1988;Kameda & Davis, 1990;Lehner, 2000), les gains et pertes antécédentes (Arkes, Hirshleifer, Jiang, & Lim, 2008, 2010Baucells, Weber, & Welfens, 2011;Post, Van den Assem, Baltussen, & Thaler, 2008), un pic de richesse antécédent (Gneezy, 2005), le niveau d'aspiration (Camerer, Babcock, Loewenstein, & Thaler, 1997;Gerhard, Hoffmann, & Post, 2015;Payne, Laughhunn, & Crum, 1980), un référentiel stochastique basé sur les anticipations rationnelles des agents (Koszegi & Rabin, 2006, 2007, l'équivalent certain (Gul, 1991), le meilleur gain de la loterie qui n'a pas été choisi (Loomes & Sugden, 1982… ...
Thesis
Dans cette thèse, nous nous intéressons à la prise de décision individuelle, dans un environnement risqué. Plus précisément, nous étudions l’effet de la taille de l’enjeu de loterie binaire, sur l’attitude des individus face au risque, et ce, pour différents niveaux de probabilités de gain.Dans un premier temps, nous avons étudié l’évolution du degré d’aversion au risque relatif, en fonction de l’augmentation du niveau d’enjeu de loteries. Nous avons mis en évidence que ce degré d’aversion augmente avec le niveau d’enjeu lorsque la probabilité de gain est faible, tandis qu’il reste constant pour les probabilités plus substantielles. Bien que ces résultats corroborent de récentes analyses en économie expérimentale, ils ne sont pas compatibles avec les modèles de décision existants. En effet, ce pattern comportemental semble remettre en question le principe de séparabilité des probabilités et des conséquences supposées par la plupart des modèles de décision.Dans un second temps, nous nous sommes intéressés à l’effet des enjeux antérieures sur la prise de risque subséquente. Nous avons mis en évidence que les comportements décisionnels sont fortement influencés par l’exposition antérieure, bien que les situations de choix soient fonctionnellement et explicitement indépendantes. Ces résultats s’inscrivent dans le modèle récemment proposé par Baucells, Kontek et Lewandowski (2018). Ce modèle suggère que la perception des conséquences d'une loterie est fonction du contexte, toutefois, il se différencie de la Prospect Theory puisqu’il suppose que, dans un contexte décisionnel donné, l’étendue des conséquences disponible sert de référentiel pour l’évaluation de l'ensemble des issues.A travers ces études, nous montrons que la perception des conséquences monétaires des loteries semble aisément manipulable et influence grandement les comportements décisionnels des agents.
... The system recommends various operation strategies such as order quantities for groceries to meet multiple criteria such as target profit. At the individual-level, with a daily target of earnings in mind, cab drivers in New York City go home early when they earn more on rainy, busy days; but make long hours to reach their target on hot summer days when they earn less (Camerer et al. 1997). ...
Article
Full-text available
Problem definition: We study a supply chain in which a supplier sets the wholesale price and a retailer responds with an order quantity. Both of the two firms can be either risk-neutral—maximizing the expected profit—or target-oriented, which is to maximize her or his ability to reach a target profit. Academic/practical relevance: Our work not only sheds light on the benefit/loss of trading with target-oriented decision makers but also, adds new knowledge to the supply chain coordination literature. Methodology: We provide strong support for firms’ target-based preference and the linear target formation model through a survey as well as analyzing company data. With the firms’ target-oriented behavior evaluated by a CVaR-satisficing measure, we apply a game theoretical framework to investigate how the target-based preference affects supply chain performance. Results: A firm, be it a supplier or a retailer, is always hurt by its target-based preference but can benefit from its trading partner’s target-based preference. A risk-neutral supplier, for example, can sometimes reap the whole supply chain’s profit if the retailer is target-oriented, and a target-oriented supplier always performs better with a target-oriented retailer than a risk-neutral one. Furthermore, a target-oriented retailer and/or supplier can help alleviate the double-marginalization effect and with a specific target, can help the supply chain achieve the same efficiency level as in a risk-neutral centralized system, with just a wholesale price contract. Another important finding is that if both firms are target-oriented, then the supply chain can have a higher expected profit under a decentralized system than a centralized one. This contrasts with the case when both firms are risk-neutral. We also investigate the role of outside option and retailer-type misidentification and find that both can alleviate the retailer’s disadvantage of being target-oriented. Managerial implications: (i) The target-based preference can be exploited by the trading partner, and hence, a firm should adopt the target-oriented decision criterion with caution. (ii) A target-oriented retailer can explore strategies such as revealing his outside option or hiding his target-based preference in order to be less manipulated. (iii) Whether a firm (and the supply chain) can benefit from its trading partner’s target-based preference often depends on how ambitious the trading partner (and the firm itself if it is target-oriented) sets the target. (iv) Target-based preference of one or both firms can help the supply chain reach the first-best efficiency. (v) When both firms are target-oriented, decentralization can be preferred to centralization.
... However, potential losses and expected returns can be also combined in non-linear ways. Previous psychological and economic research on people's subjective utilities has demonstrated that losses and gains are not equally weighted in risky and value-based decisions [60,[71][72][73]. In particular, losses are better described by a concave function, while gains are better described by a convex function. ...
Article
Full-text available
Trust is central to a large variety of social interactions. Different research fields have empirically and theoretically investigated trust, observing trusting behaviors in different situations and pinpointing their different components and constituents. However, a unifying, computational formalization of those diverse components and constituents of trust is still lacking. Previous work has mainly used computational models borrowed from other fields and developed for other purposes to explain trusting behaviors in empirical paradigms. Here, I computationally formalize verbal models of trust in a simple model (i.e., vulnerability model) that combines current and prospective action values with beliefs and expectancies about a partner’s behavior. By using the classic investment game (IG)—an economic game thought to capture some important features of trusting behaviors in social interactions—I show how variations of a single parameter of the vulnerability model generates behaviors that can be interpreted as different “trust attitudes”. I then show how these behavioral patterns change as a function of an individual’s loss aversion and expectations of the partner’s behavior. I finally show how the vulnerability model can be easily extended in a novel IG paradigm to investigate inferences on different traits of a partner. In particular, I will focus on benevolence and competence—two character traits that have previously been described as determinants of trustworthiness impressions central to trust. The vulnerability model can be employed as is or as a utility function within more complex Bayesian frameworks to fit participants’ behavior in different social environments where actions are associated with subjective values and weighted by individual beliefs about others’ behaviors. Hence, the vulnerability model provides an important building block for future theoretical and empirical work across a variety of research fields.
... Along these lines, there exist also some closely related studies that analyze dysfunctional behavioral responses without relying on the discrepancy between intrinsic and extrinsic rewards. For example, Camerer et al. (1997) find a negative elasticity of New York City cabdrivers' number of working hours with respect to realized earnings per hour. They argue that this is due to income effects, i.e., drivers having daily income targets (but see also Farber, 2008, and Crawford and Meng, forthcoming). ...
... Moreover, it is well known that increasing the 'gift' does not necessarily lead to agents making more effort since the marginal effect decreases. For the context of monetary incentives, this observation has been explained by a crowding-out effect of rewards or individual earnings targets that pose an upper limit on effort [24,43]. We observe that performance does not increase but perhaps even decreases if learning is promoted too intensely. ...
Preprint
Full-text available
Previous research on organizations often focuses on either the individual, team, or organizational level. There is a lack of multidimensional research on emergent phenomena and interactions between the mechanisms at different levels. This paper takes a multifaceted perspective on individual learning and autonomous group formation and adaptation. To analyze interactions between the two levels, we introduce an agent-based model that captures an organization with a population of heterogeneous agents who learn and are limited in their rationality. To solve a task, agents form a group that can be adapted from time to time. We explore organizations that promote learning and group adaptation either simultaneously or sequentially and analyze the interactions between the activities and the effects on performance. We observe underproportional interactions when tasks are interdependent and show that pushing learning and group adaptation too far might backfire and decrease performance significantly.
... Despite the fact that money can be infinitely accumulated, humans prefer to stop working for money once a wealth setpoint is achieved. Cab drivers in New York, for example, appear to work until a pre-established daily earning goal is achieved, even if this means to give away a large gain due to favourable circumstances (such as increased consumer demands and higher fares (Camerer et al., 1997)). Cab drivers seem therefore to comply with the "stopping rule" prescribed by this homeostatic framework: instead of maximising reward, they maximise wellbeing, composed of a combination of money and free time. ...
Thesis
Preference-based decisions entail subjective evaluation, that is, a self-referential process through which we estimate the meaning that an item has to us. In my PhD, I investigated whether the monitoring of physiological signals, the evolutionary most ancient and simplest form of self-representation, supports the self-referential process at play in preference-based decisions - even when the decisions do not bear any direct physiological consequence. In a first experiment, I show that heartbeat-evoked responses (HERs), a cortical signature of the neural monitoring of cardiac inputs, index the self-reflection at play during preference-based decisions. In addition, HER fluctuations predict subjective evaluation, both neurally and behaviourally. The results from my second experiment reveal that HERs provide a common signal allowing the coordination of different feature spaces, needed to compare attributes of goods of different natures, a mechanism that further predicts choice precision. All these results could not be trivially accounted for by changes in arousal, cortical states or changes in cardiac parameters. Altogether, in my PhD, I showed how two core features of preference-based decisions, namely their inherent subjective nature and the remarkable ability of choosing between goods of different kinds, are well accounted for by the same underlying phenomenon: the implementation of self-referential processing through neural responses to heartbeats.
... Correspondingly, the profit of taxi service is reduced. According to [37], taxi drivers have reference-dependent preferences around an earned income target. Since the taxi price is fixed in this paper, taxi drivers have reference-dependent preferences around a demand target. ...
Chapter
Full-text available
Online car-hailing service has had an exponential growth in recent years, and poses a substantial threat to taxi service. Yet how to regulate online car-hailing service has not been adequately studied. Based on the regulation of tradition taxi service, price regulation and entry limitation are used to regulate online car-hailing service in this paper. Moreover, we consider two types of online car-hailing service, i.e., high-end service(e.g. UberBlack) and low-end service (e.g., UberX), according to the perceived service level. Then, the optimal platform’s price is formulated. The result shows that the price regulation are likely to increase the optimal platform price, depending on the service type and the taxi price. When the platform offers low-end service and the taxi price is low, the optimal platform price does not change. In contrast, the entry limitation reduces the optimal platform’s price when it achieves the regulation target.
... Without a specific external reference point, it is assumed that people endogenously develop a reference point as a kind of expectation based on feedback after making choices (K} oszegi & Rabin, 2006). Assuming the endogenous reference point, it has been pointed out that people work more when wages are higher (i.e., the labor supply elasticity becomes positive value) and the labor supply elasticity becomes a negative value under certain circumstances (Camerer, Babcock, Loewenstein, & Thaler, 1997). The endogenous reference point is a key factor that determines whether an outcome is perceived as a loss or not, thus it can be a factor that brings about loss aversion in decision-making situations especially under uncertainty, where preferences are formed based on feedback. ...
Article
Full-text available
A person's propensity to attribute more weight to a loss than a gain of equal magnitude is known as “loss aversion.” Loss aversion is a component of the prospect theory (which provides a descriptive account of a person's value judgments) and has broad effects in terms of market transactions, intrapersonal decision‐making, and behavioral regulations. Previous studies have considered loss aversion as an omnipresent fundamental psychological bias; however, recent studies have highlighted the limitations of its impact. Accordingly, this paper summarizes the process and boundary conditions of loss aversion in decision‐making under risk, considering four distinct approaches: the absolute magnitude of losses, the bias of attentional allocation, the ranking of losses relative to gains, and the preference for inaction. A comprehensive overview of studies that examined loss aversion from these different perspectives reveals detailed boundary conditions for loss aversion and provides an in‐depth perspective on the mechanism of its occurrence. Based on these findings, specific directions for future loss‐aversion studies are discussed.
... We briefly mention the long line of empirical work in labor economics on decision-making by independent contractors. The topic of income and behavioral effects was first broached by Camerer et al. (1997), and subsequently investigated within the context of taxicab drivers (Farber 2008, Sheldon 2016), stadium vendors (Oettinger 1999, and fishermen (Stafford 2015). Allon et al. ...
Preprint
We study a gig economy platform's problem of finding optimal compensation schemes when faced with workers who myopically base their participation decisions on limited information with respect to their earnings. The stylized model we consider captures two key, related features absent from prior work on the operations of on-demand service platforms: (i) workers' lack of information regarding the distribution from which their earnings are drawn and (ii) worker decisions that are sensitive to variability in earnings. Despite its stylized nature, our model induces a complex stochastic optimization problem whose natural fluid relaxation is also a priori intractable. Nevertheless, we uncover a surprising structural property of the relaxation that allows us to design a tractable, fast-converging heuristic policy that is asymptotically optimal amongst the space of all policies that fulfill a fairness property. In doing so, via both theory and extensive simulations, we uncover phenomena that may arise when earnings are volatile and hard to predict, as both the empirical literature and our own data-driven observations suggest may be prevalent on gig economy platforms.
Article
The present article offers the first quantitative history of behavioural economics (BE) from the 1970s to the 2010s. We document the foundation of the field by Kahneman and Tversky in the 1980s and 1990s; the separation of experimental market economics and BE in the 1990s; the decreasing importance of psychology in the 1990s onward; and the rise of European authors after the 2000s. Overall, we show that after the 1990s, BE transformed from a unified American research program with a clearly identifiable core, to a multipolar and international research program with relatively independent subspecialties. Despite claims that BE is mostly an empirical venture, we show that the field is heavily structured by theoretical contributions. A handful of seminal models capture most of the citations in the field and explain how the subspecialties in BE emerged, stabilised, and became more autonomous from the historical core.
Article
This paper uses individual-level data linking stock investments with work performance to examine how changes in stock market wealth affect worker output. We document that a 10% increase in monthly income from stock market investments is associated with a decrease of 3.8% in the same investor's next-month work output. The negative output response is not driven by concurrent economic conditions and is unexplained by investor-specific liquidity needs. Consistent with the reference dependence interpretation, the response is short-lived and the effect is stronger when the total income has reached a reference income. Overall, our results highlight a novel channel of transmitting stock market fluctuation through labor supply.
Article
This paper is the first study to investigate the good dealness account of the endowment effect in non-market goods. We designed a within-subjects experiment to measure the value of air pollution reduction through the evaluation of a market good, PM 2.5 filters. We divided the subjects into buyers and sellers and asked them to trade four PM 2.5 filters using the Becker–DeGroot–Marschak auction under two treatments: a) a drop in air quality, which served to increase the market price of the filters; and b) the receipt of information on the relationship between death rates and air pollution, which served to increase the intrinsic value of the filters. Our results show that buyers’ willingness to pay for pollution reduction did not increase when air pollution worsened but did increase when informed of the possibility of health damage from air pollution. Sellers’ willingness to accept for air quality deterioration increased when pollution worsened but remained the same upon receiving information about health damage. We conclude that sellers are more sensitive to changes in market price, while buyers are more sensitive to changes in intrinsic value. Our findings support the theory of seeking a good deal in explaining the endowment effect.
Article
What motivates runners to bunch at round finishing times? Is it merely the immediate gratification that round time finishing brings, or do athletes set single-stage round time subgoals to help them attain multiple-stage end goals related to their future performance? To examine this question, I construct a new panel data set that covers all finishing times of 7,000 major running events of different distances organized in the Netherlands between 1996–2016. For all distances and age groups, I find strong evidence of bunching at round finishing times for both genders, but men engage in round time finishing more frequently than women. No relation is found between round time finishing and running experience. In shorter distance runs, round time finishing is much more prevalent when the reference time is ambitious. This is no proof that runners do not set round time subgoals. It however does suggest that meeting or just missing such a single-race subgoal makes no difference for a runner’s future performance in terms of continuing to race, running faster or running longer distances. It also suggests that the excessive amount of round time finishes we observe in all types of races is mainly driven by the immediate gratification (and possibly status) it gives the runner.
Article
This article explores some behavioral findings that are relevant to three areas of contract: formation, performance, and remedies. I compare the rational choice theory analysis of various aspects of contract law with how behavioral findings lead to a change in our understanding of that area of law. A penultimate section considers several criticisms of behavioral economics. A concluding section calls for altering some settled understandings of contract law to accommodate behavioral results and for further research about some still uncertain aspects of contracting.
Article
Problem definition: We study a ridesharing platform’s optimal bonus-setting decisions for capacity and profit maximization problems in which drivers set daily income targets. Academic and Practical Relevance: Sharing-economy companies have been providing monetary rewards to incentivize self-scheduled drivers to work longer. We study the effectiveness of the monetary bonus scheme in the context of the ridesharing industry, where the drivers are highly heterogeneous and set income targets. Methodology: We model a driver’s decision-making processes and the platform’s optimization problem as a Stackelberg game. Then, utilizing comprehensive datasets obtained from a leading ridesharing platform, we develop a novel empirical strategy to provide evidence on the existence of drivers’ income-targeting behavior through a reduced-form and structural analysis. Furthermore, we perform a counterfactual analysis to calculate the optimal bonus rates for different scenarios by using the characteristics of heterogeneous drivers derived from the estimation outcomes. Results: Our theoretical model suggests that the drivers’ working hours do not increase monotonically with the bonus rate under the target effect and that the platform may not use all its budget on bonuses to maximize capacity or profit. We empirically demonstrate that the drivers engage in income-targeting behavior, and furthermore, we estimate the income targets for heterogeneous drivers. Through counterfactual analysis, we illustrate how the optimal bonus scheme varies when the platform faces different driver compositions and market conditions. We also find that, compared with the platform’s previous bonus setting, the optimal bonus strategy improves the capacity level during peak hours by as much as 26%, boosting the total profit by $4.3 million per month. Managerial implications: It is challenging to develop a flexible self-scheduled supply of drivers that can match the ever-changing demand and maintain the market share of the ridesharing platform. When offering monetary bonuses to incentivize drivers to work longer, the drivers’ income-targeting behavior can undermine the effectiveness of such bonus schemes. The platform needs to understand the heterogeneity of drivers’ behavioral preferences regarding monetary rewards to design an effective bonus strategy.
Article
This paper incorporates two novelties into steady-state, macroscopic models of street-hail taxi service: (i) heterogeneous drivers; (ii) explicit treatment of a competitive rental market for medallions (the rights to cruise for passengers). When drivers vary only by reservation wage, issuing medallions raises every driver’s take-home pay, and the social optimum requires subsidy. When drivers vary only by marginal cost, issuing medallions may hurt drivers with low-enough marginal costs. Also, when quality declines with marginal cost, the social optimum may require a binding medallion quota or tax.
Article
This paper studies learning when agents evaluate outcomes in comparison to reference points, which may be adjusted in light of experience. It shows that certain models of reinforcement learning, motivated by those popular in machine learning and neuroscience, lead to classes of recursive preferences.
Article
We study how daily labor supply responds to unanticipated earnings shocks among Singapore’s taxi drivers using a novel identification strategy that uses idiosyncratic variation in booking cancellations and passenger no-shows (CNS) that drivers repeatedly receive. Our results provide new and more compelling evidence in support of the income-targeting model of labor supply. Not only are the average responses on the extensive margin consistent with the income-targeting model, but the responses on the intensive margin and the heterogeneous responses at different income levels and across driver characteristics are as well. We find that drivers work longer and earn more per hour following CNS, and the effects are robust after controlling for rich fixed effects, market supply and demand conditions, and drivers’ sunk cost of time. The CNS effects on ending a shift exhibit a U-shaped pattern, are strongest when cumulative income is close to the average shift income, and become insignificant when the income level is too low or too high. The effects are most pronounced in the first hour of CNS and fade away quickly afterward. Drivers achieve higher productivity by reducing break time, taking more jobs, driving faster, driving to places with more earning opportunities, and having more time with passengers on board. Drivers choose the response strategies that are complementary to their abilities and circumstances such as schedule flexibility and potential for productivity improvement: those with flexible working schedules tend to prolong their shifts, whereas those with flexible earnings rates tend to increase their subsequent productivity. Our novel identification strategy strengthens the empirical literature on daily labor supply, and our findings of heterogeneity effects offer new insights on income-targeting behaviors. This paper was accepted by Matthew Shum, marketing.
Article
We investigate the impacts of spatial pricing for ride-sourcing services in a Stackelberg framework considering traffic congestion. In the lower level, we use combined distribution and assignment approaches to explicitly capture the interactions between drivers’ relocation, riders’ mode choice, and all travelers’ routing decisions. In the upper level, a single transportation network company (TNC) determines spatial pricing strategies to minimize imbalance in a two-sided market. We show the existence of the optimal pricing strategies for locational imbalance minimization, and propose effective algorithms with reliable convergence properties. Furthermore, the optimal pricing is unique and can be solved in a convex reformulation when waiting time is small compared to travel time. We conduct numerical experiments on different scales of transportation networks with different TNC objectives to generate policy insights on how spatial pricing could impact transportation systems.
Article
Tests of labor supply models often rely on wages. However, wage variation alone generally cannot disentangle the classical time separable model and its extensions: reference dependent preferences (income targeting) and time nonseparable preferences (disutility spillovers; timing-specific preferences). We set up a novel laboratory experiment in which individuals choose their working time. We vary, independently, wages, historical income paths, and cumulative past work. We also vary the timing of experimental sessions. Statistical tests and stochastic revealed preference methods cannot reject the classical model in favor of income targeting or disutility spillovers, but the data suggest that labor supply varies by time-of-the-day.
Article
Purpose To run a job guarantee public policy scheme, it is important to know the aspiration level or the reference point of labor, and accordingly, the labor hour and the wage sequence are to be prepared. The existing job guarantee schemes consider the same wage rates for all types of jobs. As a result, it is to identify the reference point. The present work aims to propose a job guarantee scheme where different types of jobs have different wage rates. The paper explains the choice problem between labor and leisure at different wage rates and proposes complete computational tools to be incorporated into the job guarantee schemes. The paper also gives a mechanism to prepare the list of jobs and corresponding wage rates by maintaining a balance between labor and leisure, where productive activities measure labor hours and labor welfare measures leisure hours. Lastly, the paper provides the analytical tools to interpret the ex-post data of the job guarantee public policy schemes. Design/methodology/approach The paper has been written based on the Coordination Game and its Welfare Implications in the job guarantee public policy schemes. Findings The present paper gives an initial work to measure the choice between labor and leisure for the different wage rates practically. This will help in getting the equilibrium strategies, namely, the combination of the labor hour and the wage rate between the policymaker and the labor. This method will help to implement the job guarantee schemes. For example, to run successfully the Basic Income policy, the basic income calculation should give due care; otherwise, there will be a downward trend in the basic income and the welfare of labor will be reduced, because the labor would have to supply excess labor to meet the target income. Originality/value This paper derives theories and explains how the equilibrium in this coordination game can be achieved. The paper explains how the policy of the job guarantee schemes can be practiced practically. In the MGNREGA scheme, the public institution declares different categories of jobs with different wage rates. The categories have been classified with respect to the hours required to complete the job. Therefore, the public institution declares different lists or a sequence of pairs of labor hours and wage rates. Moreover, the list is stochastic, because the list can be changed by the inclusion of an offer from the market as well. The labor has to select from the list. The challenge on the part of the public institution is to prepare the list in such a way so that the inclusion of the market offers will not distort the equilibrium of the coordination game. An important method has been proposed here to analyze the ex-post data of job offers so that the preparation of the future sequence of the job offers can be prepared with due care. One objective of the policymaker here is to make a list of job offers in such a way so that the labor supply will be converging to a point and that will not deviate if the wage rate increases further. This objective will make a balance of the distribution of funds between the existing registered labor and the new entrants into the job guarantee schemes.
Article
As a novel and booming medium, the livestreaming industry has attracted millions of broadcasters and viewers worldwide. Gifts from viewers have become the main revenue source for most broadcasters and livestreaming platforms. This study employs data from a major showroom livestreaming platform in China to examine this practice of “gifting” during a livestreaming event. The authors first explore the antecedents of gift-receiving, which mainly focus on the effect of social interaction. The results show that the more social interactions in a live session, the more likely the broadcaster receives more gifts, and the effect is enhanced when a more experienced broadcaster is participating. Furthermore, the authors examine the consequences of gift-receiving and social interaction on broadcasters’ short-term activation and long-term retention. They find that both gift-receiving and social interaction can positively affect broadcasters’ live content provision in the short and long run, and the effects change with the increase of broadcasters’ experiences. This study offers insight into gifting in livestreaming, which gives scope for relevant future explorations.
Article
Behaviors Economics is presently a thriving field of research for many researchers. It offers a descriptive model of decision making which is entirely different from the traditional decision making models of economics. This research paper is an attempt to bring insights from Behavioral Economics which can help Human Resource personnel to address the issues like Dynamic Inconsistency and incentive design strategies.The author argues that the insight from Behavioral Economics can transform HR practices. HR managers and leaders stand to benefit from the emerging evidence from the lab and field of behavioral economics that calls for s rethinking of traditional decision making model.
Article
Sharing economy providers (SEPs) host digital platforms through which individuals can sell services to other individuals. These platforms offer two types of savings to consumers: monetary savings from lower prices typically offered by SEPs relative to legacy providers (LPs) and hassle savings from the reduced effort and/or time that consumers expend to search, identify, and transact with providers. We hypothesize that consumers will weigh monetary savings less than hassle savings if the former is below a certain threshold, but that the opposite will be true for larger savings. We empirically tested our hypothesis using ride data from Uber (SEP) and Yellow Taxi (LP). Consistent with our assumption, the study found a threshold ride distance, 6.64 miles, below which Yellow Taxi was preferred for the hassle savings and above which Uber was preferred for the monetary savings. This paper discusses implications that are generalizable for other sharing economy services.
Preprint
Full-text available
We investigate whether Cryptocurrencies enhance optimal portfolio performance for the most prominent investor personae in the Behavioral Finance literature. These are the Cumulative Prospect Theory type, the Markowitz type and the Loss Averse type of investors. To remain consistent with Second order Stochastic Dominance and Stochastic Spanning, we proceed our analysis on the grounds of risk aversion, allowing however for local non-stationarities and bubbles in the dynamics of the returns process. In the empirical application, we construct optimal portfolios with and without cryp-tocurrencies and evaluate their out-of-sample comparative performance. We also test for the presence of explosive framework for the logarithmic prices of cryptocurrencies. We find that investor impression of gains and losses affects significantly the aggregate performance of optimal portfolios and that cryptocurrencies are an attractive option for the aforementioned investor types.
Article
We match data on performance in a multiple‐choice exam with data on risk preferences from a classroom experiment. More‐loss‐averse students leave more questions unanswered and perform worse in the exam when giving an incorrect answer is penalized compared to not answering. Loss aversion parameters extracted from lottery choices in a controlled experiment thus have predictive power in a field environment of decision making under uncertainty. Furthermore, the degree of loss aversion appears to be persistent over time, as the experiment was conducted three months prior to the exam. Important differences across genders are partly explained by differences in loss aversion. This article is protected by copyright. All rights reserved.
Article
Farmers' aversion to risk can play a key role in how they make production decisions on the farm. While there is evidence that experience of shocks could alter risk preferences, most of this research relies on just one dimension of risk aversion. Using a series of incentivized lottery games, we estimated a broader set of risk preference coefficients that correspond to cumulative prospect theory, namely the probability weighting function, the curvature of the value function and loss aversion, along with a coefficient for ambiguity aversion. We attempted to understand how past harvest shocks and the sociodemographic characteristics of maize farmers in southern Mexico related to these preference parameters. Our results provide evidence that experience of more severe harvest losses is associated with greater risk aversion and stronger overweighting of small probabilities. Greater harvest shock severity was not related to loss or ambiguity aversion.
Article
Dynamic structures in intertemporal choices offer multiple channels through which reference dependence can occur. We examine intertemporal reference dependence when using choice lists to elicit time preference over outcome sequences. Reference point effects can arise endogenously within an outcome sequence and exogenously from the experimental environment of the choice list. We show that estimated discount factors in the choice list are biased by both kinds of reference points and propose a model to jointly account for both. Our experimental design with outcome sequences also enables us to jointly estimate the discount factor and utility curvature. We further discuss the implications for recent developments in the measurement of intertemporal preference. This paper was accepted by Manel Baucells, behavioral economics and decision analysis.
Article
Evidence on the labor‐market effect of immigration focuses on permanent migrants, though a large share of international labor mobility is temporary and seasonal. This paper estimates the marginal native employment effect of policy restrictions on foreign seasonal farm workers in the United States. It exploits two natural experiments: a legal requirement to give hiring preference to natives, and an exogenous change in natives' next‐best employment options during the Great Recession of 2007–2008. The local elasticity of natives' occupational labor supply is 0.0015, implying a minimal marginal effect of seasonal work visa restrictions on native employment.
Article
Information is often acquired within organizations that generate earnings for employees and stakeholders. In this paper we analyze the causal effects of inequality on information acquisition performance and vary the pay of agents relative to the earnings of passive stakeholders. Our experimental results reveal that disadvantageous inequality does not have a negative effect on agents’ performance.
Article
Ground-level ozone is a continuing problem worldwide, but there is insufficient research about the influence of ozone pollution on labor productivity in developing countries. Couriers are important for e-commerce and the rapidly developing express delivery industry around the world. Yet, due to their typical outdoor working environments, they are susceptible to the health effects of ozone pollution. We investigate the effect of ozone pollution on outdoor worker productivity in the service sector using a unique panel dataset of courier productivity from a top-five express delivery company in China. Using an instrumental variable constructed from ozone pollution of nearby upwind cities, we find that a 1 standard deviation increase in daily ozone pollution decreases courier productivity by 6.8%. The same increase in ozone over the previous 30 day period decreases worker productivity by 23.7%. Our findings emphasize an under-researched but important part of the socioeconomic costs of ozone pollution, and call for policy attention on the coordinated management of ozone pollution and particulate matters in developing countries.
Article
In the past years, work-time in many industries has become more flexible, opening up a new channel for intertemporal substitution: workers might, instead of saving, adjust their work-time to smooth consumption. To study this channel, we set up a two-period consumption/saving model with wage uncertainty. This extends the standard saving model by also allowing a worker to allocate a fixed time budget between two work-shifts. To test the comparative statics implied by these two different channels, we conduct a laboratory experiment. A novel feature of our experiments is that we tie income to a real-effort style task. In four treatments, we turn on and off the two channels for consumption smoothing: saving and time allocation. Our main finding is that savings are strictly positive for at least 85 percent of subjects. We find that a majority of subjects also uses time allocation to smooth consumption and use saving and time shifting as substitutes, though not perfect substitutes. Part of the observed heterogeneity of precautionary behavior can be explained by risk preferences and motivations different from expected utility maximization.
Article
Full-text available
Recent research has revealed a pattern of choice characterized as diversification bias: If people make combined choices of quantities of goods for future consumption, they choose more variety than if they make separate choices immediately preceding consumption. This phenomenon is explored in a series of experiments in which the researchers first eliminated several hypotheses that held that the discrepancy between combined and separate choice can be explained by traditional accounts of utility maximization. On the basis of results of further experiments, it was concluded that the diversification bias is largely attributable to 2 mechanisms: time contraction, which is the tendency to compress time intervals and treat long intervals as if they were short, and choice bracketing, which is the tendency to treat choices that are framed together differently from those that are framed apart. The researchers describe how the findings can be applied in the domains of marketing and consumer education. (PsycINFO Database Record (c) 2012 APA, all rights reserved)
Article
Full-text available
Based upon a recently developed multiattribute generalization of prospect theory's value function (Tversky and Kahneman 1991), we argue that consumer choice is influenced by the position of brands relative to multiattribute reference points, and that consumers weigh losses from a reference point more than equivalent sized gains (loss aversion). We sketch implications of this model for understanding brand choice. We develop a multinomial logit formulation of a reference-dependent choice model, calibrating it using scanner data. In addition to providing better fit in both estimation and forecast periods than a standard multinomial logit model, the model's coefficients demonstrate significant loss aversion, as hypothesized. We also discuss the implications of a reference-dependent view of consumer choice for modeling brand choice, demonstrate that loss aversion can account for asymmetric responses to changes in product characteristics, and examine other implications for competitive strategy.
Article
Full-text available
A new model of consumer behavior is developed using a hybrid of cognitive psychology and microeconomics. The development of the model starts with the mental coding of combinations of gains and losses using the prospect theory value function. Then the evaluation of purchases is modeled using the new concept of “transaction utility.” The household budgeting process is also incorporated to complete the characterization of mental accounting. Several implications to marketing, particularly in the area of pricing, are developed.
Article
Full-text available
This survey aims at providing the reader with a thread through the literature on the topic of panel econometrics of labour supply, reporting also on the evaluation of the data used in these studies, and summarizing their substantive results. It documents the present trend away from models that take advantage of panel data almost exclusively in order to control for unobserved heterogeneity, towards fully dynamic models where wages become endogenous and consequently the concept of wage elasticity loses much of its appeal.
Article
Full-text available
Contrary to theoretical expectations, measures of willingness-to-accept greatly exceed measures of willingness-to-pay. This paper reports several experiments that demonstrate that this "endowment effect" persists even in market settings with opportunities to learn. Consumption objects (e.g., coffee mugs) are randomly given to half the subjects in an experiment. Markets for the mugs are then conducted. The Coase theorem predicts that about half the mugs will trade, but observed volume is always significantly less. When markets for "induced-value" tokens are conducted, the predicted volume is observed, suggesting that transactions costs cannot explain the undertrading for consumption goods. Copyright 1990 by University of Chicago Press.
Article
Full-text available
The equity premium puzzle refers to the empirical fact that stocks have outperformed bonds over the last century by a surprisingly large margin. We offer a new explanation based on two behavioral concepts. First, investors are assumed to be “loss averse,” meaning that they are distinctly more sensitive to losses than to gains. Second, even long-term investors are assumed to evaluate their portfolios frequently. We dub this combination “myopic loss aversion.” Using simulations, we find that the size of the equity premium is consistent with the previously estimated parameters of prospect theory if investors evaluate their portfolios annually.
Article
Myopic loss aversion is the combination of a greater sensitivity to losses than to gains and a tendency to evaluate outcomes frequently. Two implications of myopic loss aversion are tested experimentally. 1. Investors who display myopic loss aversion will be more willing to accept risks if they evaluate their investments less often. 2. If all payoffs are increased enough to eliminate losses, investors will accept more risk. In a task in which investors learn from experience, both predictions are supported. The investors who got the most frequent feedback (and thus the most information) took the least risk and earned the least money.
Article
"Adaptation levels appear as neutral or indifferent zones in bipolar responses… . Adaptation levels are revealed in all forms of behavior whether they are sensory, motor, or cognitive verbal in nature… . We have found that the weighted log mean definition of AL [Adaptation Level] is the best approximation to the neutral or indifferent region for sensory magnitudes." Studies indicating current trends that bear on fundamental issues in AL theory are considered under the following headings: Anchoring Effects of Subliminal Stimuli; Residual Effects of Anchors in Memory and Recall; Series Effects with an Absolute, Extraexperimentally Anchored Language; Neutral Zones in Unexpected Places; Assimilation and Contrast in Sensory and Social-judgmental Processes; The Methodological Importance for Social Psychology of Studies Leading to Functional Relations Between Variables; and An Adaptation-level for Reinforcement and Performance. (PsycINFO Database Record (c) 2012 APA, all rights reserved)
Article
Wages and their effect on labour supply are not only an important subject for labour economists who aim at measuring substitution and income effects. Additionally, the government is interested in the impact of policy changes on the labour market and companies would like to know if it is possible to increase labour supply and especially productivity by increasing the wage rate. This paper introduces a dynamic version of the traditional model of labour supply and presents model extensions and the underlying behavioural assumptions arising from empirical findings, psychology and neuroscience. It evaluates findings and behavioural assumptions derived so far. None of the contributions investigated in this work is entirely free from criticism. The problem of analysing a comprehensive model of labour supply on the one hand, is the scarcity of suitable subjects to investigate and on the other hand, the individuality of each subject observed. With this work a critical analysis of existing research on labour supply decisions is provided. This shall contribute to motivate and ease future research in this area which has to take these problems into account.
Article
Does the period over which individuals evaluate outcomes influence their investment in risky assets? Results from this study show that the more frequently returns are evaluated, the more risk averse investors will be. The results are in line with the behavioral hypothesis of “myopic loss aversion,” which assumes that people are myopic in evaluating outcomes over time, and are more sensitive to losses than to gains. The results have relevance for the equity premium puzzle, and also for the marketing strategies of fund managers.
Article
Much experimental evidence indicates that choice depends on the status quo or reference level: changes of reference point often lead to reversals of preference. The authors present a reference-dependent theory of consumer choice, which explains such effects by a deformation of indifference curves about the reference point. The central assumption of the theory is that losses and disadvantages have greater impact on preferences than gains and advantages. Implications of loss aversion for economic behavior are considered. Copyright 1991, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
Article
Modern neoclassical business cycle theories posit that the observed fluctuations in consumption and employment correspond to decisions of an optimizing representative individual. We estimate three first-order conditions that represent three tradeoffs faced by such an optimizing individual. He can trade off present for future consumption, present for future leisure, and present consumption for present leisure. The aggregate U. S. data lend no support to this model. The overidentifying restrictions are rejected, and the estimated utility function is often convex. Even when it is concave, the estimates imply that either consumption or leisure is an inferior good.
Article
I test the disposition effect, the tendency of investors to hold losing investments too long and sell winning investments too soon, by analyzing trading records for 10,000 accounts at a large discount brokerage house. These investors demonstrate a strong preference for realizing winners rather than losers. Their behavior does not appear to be motivated by a desire to rebalance portfolios, or to avoid the higher trading costs of low priced stocks. Nor is it justified by subsequent portfolio performance. For taxable investments, it is suboptimal and leads to lower after-tax returns. Tax-motivated selling is most evident in December. Copyright The American Finance Association 1998.
Article
This chapter presents a survey on the labor supply of men. This survey of male labor supply covers the determinants of whether men work for pay in the labor market and, if so, the determinants of their hours of work. The chapter also discusses the work behavior of men prior to their retirement from the labor force. Moreover, even though there are noteworthy investigations into the labor supply of men in many different countries, this survey is restricted almost entirely to the Anglo-American literature. The chapter identifies the major time-series and cross-section empirical regularities in male labor supply behavior. It is these that any economic theory should be designed to address. The chapter presents the canonical static model of labor supply and then immediately proceeds to deal with the problems in applying this model at the aggregative level. The static model is amended to handle the situation of nonlinear budget constraints. The chapter concludes with an outline of the most popular life-cycle model of labor supply. The chapter also addresses the issues in and results from the estimation of the static model. Problems in specifying the model are first considered and then the results are presented from the U.S. nonexperimental literature, the British literature, and the U.S. experimental literature. The chapter also discusses the estimates from the applications of the life-cycle model.
Article
The paper presents a general theoretical framework for the analysis of integrated life-cycle models of consumption and family labor supply under uncertainty. Profit functions are used to represent intertemporally additive preferences and to yield convenient characterizations of "constant marginal utility of wealth" or "Frisch" demand functions. Conditions on preferences derived that allow additive fixed-effect specifications for the Frisch demands. Data from the British Family Expenditure Surveys from 1970-77 are used to derive panel-like information on male labor supply and consumption for several age cohorts over time. These data reproduce standard life-cycle patterns of hours and wages, but more detailed analysis shows that the theory is incapable of offering a satisfactory common explanation of the behavior of hours and wages over both the business cycle and the life cycle. Similarly, although the theory can explain the life-cycle behavior of hours and consumption separately, the same model cannot explain both, essentially because of a failure in symmetry.
Article
Analysis of decision making under risk has been dominated by expected utility theory, which generally accounts for people's actions. Presents a critique of expected utility theory as a descriptive model of decision making under risk, and argues that common forms of utility theory are not adequate, and proposes an alternative theory of choice under risk called prospect theory. In expected utility theory, utilities of outcomes are weighted by their probabilities. Considers results of responses to various hypothetical decision situations under risk and shows results that violate the tenets of expected utility theory. People overweight outcomes considered certain, relative to outcomes that are merely probable, a situation called the "certainty effect." This effect contributes to risk aversion in choices involving sure gains, and to risk seeking in choices involving sure losses. In choices where gains are replaced by losses, the pattern is called the "reflection effect." People discard components shared by all prospects under consideration, a tendency called the "isolation effect." Also shows that in choice situations, preferences may be altered by different representations of probabilities. Develops an alternative theory of individual decision making under risk, called prospect theory, developed for simple prospects with monetary outcomes and stated probabilities, in which value is given to gains and losses (i.e., changes in wealth or welfare) rather than to final assets, and probabilities are replaced by decision weights. The theory has two phases. The editing phase organizes and reformulates the options to simplify later evaluation and choice. The edited prospects are evaluated and the highest value prospect chosen. Discusses and models this theory, and offers directions for extending prospect theory are offered. (TNM)
Article
This paper discusses the bias that results from using nonrandomly selected samples to estimate behavioral relationships as an ordinary specification error or "omitted variables" bias. A simple consistent two stage estimator is considered that enables analysts to utilize simple regression methods to estimate behavioral functions by least squares methods. The asymptotic distribution of the estimator is derived.
Limited Computation and Fairness in Sequential Bargaining Experiments
  • Eric J Johnson
  • Colin F Camerer
  • Talia Rymon
  • Sankar Sen
Taxi Trip and Fare Data: A Compendium
  • Limousine Nyc Taxi
  • Commission
Labour Conditions in East Africa (London: Colonial Of ce
  • G Orde-Brown
University of California at Berkeley working paper
  • David Bowman
  • Debby Minehart
  • Matthew Rabin