This paper provides evidence that free riders are heavily punished even if punishment is costly and does not provide any material benefits for the punisher. The more free riders negatively deviate from the group standard the more they are punished. As a consequence, the existence of an opportunity for costly punishment causes a large increase in cooperation levels because potential free riders face a credible threat. We show, in particular, that in the presence of a costly punishment opportunity almost complete cooperation can be achieved and maintained although, under the standard assumptions of rationality and selfishness, there should be no cooperation at all. We also show that free riding causes strong negative emotions among cooperators. The intensity of these emotions is the stronger the more the free riders deviate from the group standard. Our results provide, therefore, support for the hypothesis that emotions are guarantors of credible threats.

https://papers.ssrn.com/sol3/Delivery.cfm/000105463.pdf?abstractid=203194&mirid=1&type=2

Cooperation and Punishment in Public Goods Experiments

Complex dynamical systems, ranging from ecosystems to financial markets and the climate, can have tipping points at which a sudden shift to a contrasting dynamical regime may occur. Although predicting such critical points before they are reached is extremely difficult, work in different scientific fields is now suggesting the existence of generic early-warning signals that may indicate for a wide class of systems if a critical threshold is approaching.

/pdf/early-warning-signals-for-critical-transitions-1qy2ayqlyk.pdf

Early-warning signals for critical transitions

Casual evidence as well as daily experience suggest that many people have a strong aversion against being the 'sucker' in social dilemma situations. As a consequence, those who cooperate may be willing to punish free-riding, even if this is costly for them and even if they cannot expect future benefits from their punishment activities. A main purpose of this paper is to show experimentally that there is indeed a widespread willingness of the cooperators to punish the free-riders. Our results indicate that this holds true even if punishment is costly and does not provide any material benefits for the punisher. In addition, we provide evidence that free-riders are punished the more heavily the more they deviate from the cooperation levels of the cooperators. Potential free-riders, therefore, can avoid or at least reduce punishment by increasing their cooperation levels. This, in turn, suggests that in the presence of punishment opportunities there will be less free riding. Testing this conjecture is the other major aim of our paper.

https://www.econstor.eu/bitstream/10419/75478/1/cesifo_wp183.pdf

Over the past few years, there has been a steadily increasing interest on the part of economists in happiness research. We argue that reported subjective well-being is a satisfactory empirical approximation to individual utility and that happiness research is able to contribute important insights for economics. We report how the economic variables income, unemployment and inflation affect happiness as well as how institutional factors, in particular the type of democracy and the extent of government decentralization, systematically influence how satisfied individuals are with their life. We discuss some of the consequences for economic policy and for economic theory.

What Can Economists Learn from Happiness Research

This article discusses the economic implications of reciprocity. A long-standing tradition in economics views human beings as exclusively self-interested. In most economic accounts of individual behavior and aggregate social phenomena, the vast forces of greed are put at the center of the explanation. However, many people deviate from purely self-interested behavior in a reciprocal manner. Reciprocity means that in response to friendly actions, people are frequently much nicer and much more cooperative than predicted by the self-interest model; conversely, in response to hostile actions they are frequently much more nasty and even brutal. There is considerable evidence that a substantial fraction of people behave according to this dictum: People repay gifts and take revenge even in interactions with complete strangers and even if it is costly for them and yields neither present nor future material rewards. This notion of reciprocity is thus very different from kind or hostile responses in repeated interactions that are solely motivated by future material gains.

/pdf/fairness-and-retaliation-the-economics-of-reciprocity-3kli7g3xjv.pdf

Fairness and Retaliation: The Economics of Reciprocity

We present results from a large-scale international survey on risk preferences conducted in 53 countries. In all countries, we find, on average, an attitude of risk aversion in gains and of risk seeking in losses. The degree of risk aversion shows significant cross-country differences. Moreover, risk attitudes in our sample depend not only on economic conditions but also on cultural factors, as measured by the Hofstede dimensions individualism and uncertainty avoidance. The data may also serve as an interesting starting point for further research on cultural differences in behavioral economics.

Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2013.1869 .

This paper was accepted by Peter Wakker, decision analysis.

Risk Preferences Around the World

The models of portfolio selection and asset price dynamics in this volume seek to explain the market dynamics of asset prices. Presenting a range of analytical, empirical, and numerical techniques as well as several different modeling approaches, the authors depict the state of debate on the market selection hypothesis. By explicitly assuming the heterogeneity of investors, they present models that are descriptive and normative as well, making the volume useful for both finance theorists and financial practitioners. This book explains the market dynamics of asset prices, offering insights about asset management approaches. It assumes a heterogeneity of investors that yields descriptive and normative models of portfolio selections and asset pricing dynamics.

Handbook of Financial Markets: Dynamics and Evolution

The disposition effect is the observation that investors tend to realize gains more than losses. This behavior is puzzling because it cannot be explained by traditional finance theories. A standard explanation of the disposition effect refers to prospect theory and, in particular, to the asymmetric risk aversion, according to which investors are risk-averse when faced with gains and risk-seeking when faced with losses. We show that for reasonable parameter values, the disposition effect cannot, however, be explained by prospect theory. The reason is that those investors who sell winning stocks and hold losing assets would not have invested in stocks in the first place. That is, the standard prospect theory argument is sound ex-post, assuming that the investment occurred, but not ex-ante, requiring also that the investment has to be made in the first place.

/pdf/does-prospect-theory-explain-the-disposition-effect-ekkv93u6qv.pdf

Does Prospect Theory Explain the Disposition Effect

https://www.zora.uzh.ch/id/eprint/130217/1/How_Time_Preferences_Differ.pdf

How time preferences differ: Evidence from 53 countries

We present results from the first large-scale international survey on time discounting, conducted in 45 countries. Cross-country variation cannot simply be explained by economic variables such as interest rates or inflation. In particular, we find strong evidence for cultural differences, as measured by the Hofstede cultural dimensions. For example, high levels of Uncertainty Avoidance or Individualism are both associated with strong hyperbolic discounting. Moreover, as application of our data, we find evidence for an impact of time preferences on the capability of technological innovations in a country and on environmental protection.

/pdf/how-time-preferences-differ-evidence-from-53-countries-56ygzuo567.pdf

Thorsten Hens

Papers

Risk Preferences Around the World

Handbook of Financial Markets: Dynamics and Evolution

Does Prospect Theory Explain the Disposition Effect

How time preferences differ: Evidence from 53 countries

How Time Preferences Differ: Evidence from 53 Countries