The purpose of this paper is to analyse influence of trust on economic behavior. The author distinguishes results of researches that evidence the significant influence of physiological, social, cultural and informational factors on forming of trusting behavior. The original classification is also proposed. The author proposes four forms of trust that are defined on the most significant mean of transferring of the information and provides a comparative analysis of different forms of informational trust.

Notwithstanding continuous attempts to improve financial market stability in the af-termaths of the financial markets’ crises, money and capital markets remain highly susceptible to adverse shocks. Against this backdrop, the International Monetary Fund (IMF) raised the question to what extent investor herding could determine the magnitude of a new financial crisis – particularly as since the late 1990s, herding among global mutual funds as well as international equity investors has steadily been increasing. This development can, at least partly, be ascribed to traditional investors being subject to crowding-out effects related to a historically unprecedented and long lasting global low-yield environment attributed to central banks’ excessively ac-commodative monetary policies (QE). Yet, decisions in any such environment are not representative as the only investors remaining active are those who are able to han-dle higher risks amid lower yields. Further, prices are reflexive, i.e. they are based on investors’ expectations, which, in turn, are influenced by other investors’ expecta-tions. As traditional (neoclassical) models fall short of establishing a comprehensive relationship between investor behaviour and financial market distress, this contribu-tion seeks to include behavioural features. Specifically, this paper aims to analyse in what way (conscious or unconscious) investor herding contributes to pro-cyclical de-velopments and thus ultimately to financial market vulnerability and future instability.

Offering an extended warranty on goods is a common practice of last years. It is clear, however, that insurance is a business like any other and that the seller has to benefit from the provision of such service. Behavioral literature on this topic suggests that there are several cognitive factors which bias consumers towards obtaining insurance – for instance, loss aversion or probability weighting. The effect of those biases might be multiplied by the fact that sellers mostly do not disclose information about the likelihood of an insured event (base-rates). Our laboratory experiment (N=214) shows that base-rate disclosure might dramatically decrease the amount of money that are consumers willing to pay for the extended warranty. This finding might be the first step toward more effective consumer protection in the area of insurance.

Contrary to theoretical predictions, experiments reveal that individuals often cooperate in one-shot Prisoner’s Dilemma. This paper argues that the cooperative behavior is at least partly explained by goal-based reasoning. Specifically, in the cooperative outcome, the two players’ goals are mutually compatible. In contrast, the players’ goals to obtain the highest outcome are not mutually compatible. The relevance of goal-based reasoning is tested experimentally. The hypothesis that individuals cooperate because their goals are mutually compatible, is not rejected. A theoretical framework, which formally includes goal-based reasoning, is proposed. This theoretical framework can account for the observed behavior while being at the same time in line with the conventional approach.

Austerity plans have increased the use of cost-effective tools in public policy. Behavioral insights and randomized control trials help shape the type of policies used while guaranteeing their efficiency. Accordingly, governments have been pushing for low-cost alternatives to orientate people’s behavior: nudges. These “libertarian paternalistic” procedures are not free of issues: they may not achieve long-lasting effects, they may backfire producing opposite results, they could represent an unwanted manipulation of our choices, and we lack data that compares them with other educational methods. Following Gerd Gigerenzer’s line of thought, this paper takes into account these criticisms, while focusing on how nudges, which consider only an instrumental view of our rationality, neglect our expressive rationality. Our rationality is bounded, instrumental, and expressive (axiological.) All components are relevant in decision making, and considering them should be a requirement for any comprehensive public policy strategy. Consequently, there are issues related to the health and well-being of citizens for which solutions cannot be reduced to nudges. An example is found in policies used to reduce gender violence. To highlight the importance of expressive rationality, I will also refer to people’s participation in voting processes and regulations regarding the labeling of GMOs. This paper aims to show that, for ethical and efficiency reasons, any type of public policy approach should consider all components of our rationality: the bounded, the instrumental, and the expressive. Therefore, if nudges are to be used, they should have an educational perspective. But if they do, are they still nudges?

In the past decades, behavioral finance has steadily gained importance with respect to better understanding decision-making under uncertainty. Traditional economic models, among them most neo-classical capital market theories, fail to adequately assess market agents’ behavior. In contrast to these models, market agents appear to be prone to biased judgements. Individuals prefer to maintain the status quo as they are afraid of committing mistakes, which could ceteris paribus afterwards cause a feeling of regret. They thus rather do nothing and accept opportunity costs as these, according to the Prospect Theory, feel like missed profits instead of realized losses. Another explanation for biased judgment is over-confidence, which implies that individual investors trade too often as they consider their information to be more valuable than that of others. Overconfidence and status quo preference are two very different explanations for biased judgements, which triggers the question to what extent individual decisions actually existent.

This paper discusses the impact of the social environment on decision-making under uncertainty. The main emphasis, in an environment best characterized by bounded rationality, will be placed on herd behavior, which is assumed to replace the concept of individual decision-making. The herd shapes judgments by generating frames, which, for evolutionary reasons, economic agents will likely not trespass.

In light of the above, speculative bubbles are a prime example of how investors’ biased perceptions about losses and gains trigger an emotions-based process of decision-making. Institutional economics, among others, illustrates that economic agents appear to follow an institutional system which shapes their behaviors and thus their decision-making. Uncertainty, it seems, can be meaningfully reduced by simply reflecting the herd’s investment decision.

Preliminary findings suggest contradictions concerning biases in decision-making of individuals versus those of a herd. This paper focuses on the role of the social environment to correctly predict behavioral patterns prior to market agents engaging in strategic considerations about generating excess returns. Further, literature distinguishes between rational and irrational herd behaviour. Ultimately, this leads to the question to which extent herding could indeed be a rational phenomenon.

We study the role of experience in the formation of asset price bubbles. Therefore, we conduct two related experiments. One is a call market experiment in which participants trade assets with each other. The other is a learning-to-forecast experiment in which participants only forecast future prices, while the trade, which is based on these forecasts, is computerized. Each experiment comprises three treatments that vary the amount of information about the fundamental value that participants receive. Each market is repeated three times. In both experiments and in all treatments, we observe sizable bubbles. These bubbles do not disappear with experience. Our findings in the call market experiment stand in contrast to the literature. Our findings in the learning-to-forecast experiment are novel. Interestingly, the shape of the bubbles is different between the two experiments. We observe flat bubbles in the call market experiment and boom-and-bust cycles in the learning-to-forecast experiment.

When an opportunity is present, having a justification increases the chances that people will cheat. Justification might be easier, for example, when a situation is ambiguous or when there is an altruistic reason to cheat. In a laboratory experiment, we used a task where people could cheat to benefit themselves or a charity. Overall, a small proportion of people cheated to a moderate degree while others did not appear to cheat at all. The rate of cheating was more pronounced in trials where the correct answer was more ambiguous, but it did not differ between cheating for the charity and oneself. However, people did not cheat as much in trials where they would cheat for the benefit of one recipient at the expense of the other. Crucially, mouse tracking analysis suggested that cheating was relatively deliberate rather than automatic. People hesitated more on trials where they were tempted to cheat, but there was no change in the initial direction of mouse movement on such trials. Response times were also slower in more tempting trials, where people were motivated to cheat. Our results suggest that only a small proportion of people cheat, they cheat in a moderate degree, and that cheating is a relatively deliberate process.

We postulate the existence of a cognitive bias that alters individual perceptions of wealth in risk-free and time-invariant contexts with no probabilistic attributes. We call it the leverage bias: for a given positive (negative) net worth, individuals have greater perceived wealth when their leverage ratio is lower (higher). We assume that the leverage bias correlates with debt attitudes and that greater perceived wealth implies a higher likelihood to borrow. By means of a small scale quasi-experimental survey with some incentivized tasks, we (1) provide evidence of the existence of the leverage bias; (2) we disentangle the role of behavioral characteristics that predict its presence; and (3) we evaluate its relation with attitudes towards debt. Subjects with the leverage bias are less cognitively sophisticated, more impatient, less debt averse, more likely to take on debt and to increase spending out of unexpected gains, compared to subjects with no bias. Our findings shed some light on the possible determinants of individual debt overhang and provide the rationale for policies incorporating behavioral insights aimed at improving financial decisions.

Imperfect information and inattention can drive a wedge between intentions and actions, e.g. with regard to household energy conservation. Importantly, such behavioral barriers may positively interact with each other, implying that behavioral interventions will remain below potential if they do not address all barriers simultaneously. We run a three-month randomized field experiment on energy use in the shower (N = 351 subjects) that combines real-time feedback, targeted mainly at inattention, and home energy reports, targeted mainly at imperfect information. Home energy reports alone do not induce conservation, despite significant learning effects, whereas real-time feedback alone leads to 18% energy savings per shower. Combining both interventions enhances this savings effect by over 50%. Lack of immediate attention and information seem to have prevented knowledge about environmental impacts from translating into behavioral change.

We conducted a reverse dictator game on a virtual grid of overlapping neighborhoods consisting of participants from Australia, Germany and Japan. The experiment comprised two stages, played for 20 rounds: (i) Choosing one’s neighbors – wherein participants were given a (costly) opportunity to influence the composition of their 5-person neighborhoods by choosing their neighbors’ gender (M/F) and location (AU/DE/JP), and (ii) Reverse dictator – wherein particpants played a symmetric reverse dictator game with each of their neighbors, knowing their gender and location characteristics. The two treatments we ran differed in the amount of feedback information revealed to subjects after each round. In the full feedback treatment subjects were informed how many points each of their neighbors had taken from them, whilst in the partial feedback treatment only the total number of points was revealed. Along with a few predictable treatment effects, e.g. participants spend relatively more points choosing neighbors and then take relatively more from each other when their characteristics are not revealed (partial feedback), we also find some interesting location and gender effects, e.g. female participants take more points then male particpants do with full feedback only and this tendency is reversed with partial feedback, but not for participants from Japan; participants from Germany play closest to equilibrium, particiapants from Australia farthest, with participants from Japan in between – yet they still earn on average more than participants from Germany in the full feedback treatment only. Our results have potential implications for social inclusion and immigration policies, both pressing issues for many developed economies of today, especially the demographically troubled Japan.

Music offers a unique spectrum of situations to study human choice behaviour. Why do we choose to listen to (and pay for) the music that we do? How do music pref-erences change over time? How can we explain large-scale music success? Today, it remains unclear to what extent music may prove exceptional or congruent with general theories of human judgements and decision making. However, the rich, multisensory, aesthetic, and highly emotional nature of music might have the potential to challenge some of these theories, enhancing their general-izability and scope. The Behavioural Economics of Mu-sic (BEM) aims to create a solid understanding of the role that behavioural economics and the psychology of decision making can play in the study of music listening and choice behaviour. In this paper, I present three origi-nal studies conducted by the authors to support the BEM and show potential benefits and applications of this re-search framework.

This paper shows that, in the framework of Cumulative Prospect Theory, subproportionality as a property of the probability weighting function alone does not automatically imply the common ratio effect. As a solution, we propose a new characteristic for probability weighting functions, called indistinguishability of small probabilities, that implies the common ratio effect for any S-shaped value function. The ratio of decision weights for infinitesimally small probabilities characterizes indistinguishability of small probabilities and is an informative measure for the curvature of the probability weighting function at zero. The intuition behind indistinguishability is that, even though the ratio of probabilities stays constant at a moderate level, individuals tend to neglect this relative difference when probabilities get smaller.

This paper focuses on teaching on how visual design in the context of students help them to uncover an unexpressed want or desire in a given microcosm on campus. It begins with a conceptualization of observation of want or desire through the lenses of (for instance) technology, power, identity, consumption, belief, and health developing solutions towards Behavioral Critical Nudge design. The target is as a stance oriented to questioning and challenging the often takenfor-granted meanings and assumptions found in ‘everyday’ lives and things getting unnoticed. It then discusses how students can cultivate the visual design application as a stance through relevant situations affecting human creativity where the object is to motivate people (students on campus) to a different approach interpreting things or solving problems towards long-lasting habit creating choice architecture. The project aimed at encouraging students to question the underlying motivations of seemingly unremarkable visuals (‘making the familiar strange’) and produce alternative visuals that challenge and destabilize the normative structures of society (‘making the strange familiar’). The paper aims at how the student body was directed, guided with the aim of exploring questions concerning both the multiple dimensions of visual communication methodologies and innovative methods for designing and applying visuals interrogating the process of analysis towards behavioral change. This paper reflects my contribution to this discussion, Visual Methodologies; which embeds within the design production and analysis approaches I have adopted researching and designing the class within the fields of psychology and behavioral economics terminology applications. The paper embeds creative modes within the field of visual studies and draws on research conducted with college campus students as a project, focusing on issues of familiarity, creativity, and interpretation. Lastly, the paper reflects on why it is essential for students and practitioners in interdisciplinary studies to have the analytical tools to decipher the meanings that the image maker intended, as well as the meanings later assigned to visual images as choice architecture to nudge the behavior towards problemsolving.

We assess the impact of R&D related disclosure of pharmaceutical companies on stock prices using an event study approach. The event study is based on more than 700 clinical trial events of 300 companies and includes project specific information such as product technology and clinical stage. We find that negative clinical trial announcements are associated to larger price shocks than positive ones. This asymmetric shock pattern is mainly driven by late stage clinical trails and is not evident in early phases. We hypothesize that investor expectations on the success propensity of a drug are reflected in company stock value and increase during product development. This hypothesis is tested by exploiting the variation in historical success rates over drug categories. Overall, our results provide insights in how financial markets anticipate events of uncertain outcome.

Following up on our last year’s contribution, we present new research in the vein of biological factors’ influence on altruistic behavior in humans. This cross-disciplinary approach is fostered by classic works such as Trivers (1971), trying to explain the evolution of altruism in terms of reciprocity and factors that might modulate it (such as health of the interacting individuals and thus a greater or lower chance of repeated interactions), or new papers like Lewin-Epstein et al. (2017), asking if altruism could have evolved due to manipulation by infectious agents, increasing their chances of spreading to another host by fostering their close social interactions through more altruistic behavior. The authors proposed testing the hypothesis by comparing altruism in populations (not) taking antibiotics (further ATB), which have severe adverse effects on the microbiome. Last year, we tested the Lewin-Epstein hypothesis on a large sample of university students who had provided information on whether they’d taken antibiotics in the last several years, and played a hypothetical Dictator Game (further DG; Forsythe et al. 1994), used as a proxy of altruism. No relationship between DG and ATB use was observed, but the study was limited by lacking a more fine-grained time frame, since the microbiome can be quickly replenished after ATB use has ended. In the current study, we have investigated whether recent ATB use (three months or less) has any effect on altruism in the DG and also the Trust Game (Berg et al. 1995), and also found none. It is our conclusion that the Lewin-Epstein model is far too simplified to provide a meaningful prediction, but it might benefit from including more complex relationships. If the microbiome research in itself and specifically in the question of the microbiome’s effects on mood and behavior has shown anything, it is that the links are very complex and can run both ways. Testing the more general prediction stemming from Trivers (1971) that greater health should be associated with increased altruism also did not yield significant results. It appears that in present day, health factors play little role in modulating altruistic behavior in humans, and while they potentially may have played a role under evolutionary timescales, there seems to be little value in adding their explanatory power to psychological and social factors.

The aim of this study is to examine the effect of risk attitudes and behavioral biases on cognitive reflection. Also, the authors focused on the correlation between risk attitude, cognitive reflection test and number and risk literacy using regression analysis models. Frederick’s three items questionnaire was used to measure the cognitive abilities while several questions were addressed to capture samples’ risk preferences. Additionally, Berlin numeracy test was used to estimate the level of statistical numeracy and risk literacy. The study was conducted on a sample of 120 undergraduate students showing that behavioral biases and risk literacy are correlated with the level of cognitive reflection. It was also found that gender and age are significantly correlated with CRT score.

In this paper, we develop non-parametric tests for Prospect and Markowitz Cumulative Stochastic Spanning in order to determine the performance of investors’ specific behavioral patterns in the domains of losses and gains. We take into account the shapes of the related utility functions and the associated probability weighting functions, in order to determine the the returns of optimal portfolios which are created, based on the aforementioned preferences and attitudes towards risk. Spanning occurs when enhancing the opportunity set or relaxing the investment constraints, the investment possibility set does not improve for a given class of investors. Therefore, we test empirically whether added cryptocurrencies to a portfolio consisting of traditional assets, is a better choice for every individual with preferences exhibiting certain patterns of local attitudes towards risk. Thus, we are trying to determine whether the formation of a portfolio with added cryptocurrencies, as investment options, such as Bitcoin, Ethereum etc., implies that a specific pattern-attitude in investor’s behavior performs better than the one consisting merely of traditional assets. We formulate a testing procedure for Prospect and Markowitz Cumulative Stochastic Spanning for two portfolio sets based on subsampling and Linear Programming. Our results indicate that if investors employ a reverse S-shaped utility function (Markowitz type) together with an inverse probability weighting function, which declares risk aversion for losses and risk seeking for gains, they outperform the portfolio consisting only of traditional assets. Analogously, we take similar results for Prospect Cumulative Stochastic Spanning where the utility function is S-shaped and the probability weighting functions is again inverse S-shaped.