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 asses 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 decisionmaking. 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 focusses 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.