Working Papers and Recent Publications

The Effect of Language on Economic Behavior: Evidence from Savings Rates, Health Behaviors, and Retirement Assets
This Draft: January, 2012
Revise and resubmit: American Economic Review
Abstract:
Languages differ widely in the ways they partition time. In this paper I test the hypothesis that languages which grammatically distinguish between present and future events (what linguists call strong-FTR languages) lead their speakers to take fewer future-oriented actions. First, I show how this prediction arises naturally when well-documented effects of language on cognition are merged with models of decision making over time. Then, I show that consistent with this hypothesis, speakers of strong-FTR languages save less, hold less retirement wealth, smoke more, are more likely to be obese, and suffer worse long-run health. This is true in every major region of the world and holds even when comparing only demographically similar individuals born and living in the same country. While not conclusive, the evidence does not seem to support the most obvious forms of common causation. Implications of these findings for theories of intertemporal choice are discussed.

One-Way Essential Complements
Joint with Barry Nalebuff
This draft: April, 2007
Abstract:
While competition between firms producing substitutes is well understood, less is known about rivalry between complementors. We study the interaction between firms in markets with one-way essential complements. One good is essential to the use of the other but not vice versa, as arises with an operating system and applications. Our interest is in the division of surplus between the two goods and the related incentive for firms to create complements to an essential good.
Formally, we study a two-good model where consumers value A alone, but can only enjoy B if they also purchase A. When one firm sells A and another sells B, the firm that sells B earns a majority of the value it creates. However, if the A firm were to buy the B firm, it would optimally charge zero for B, provided marginal costs are zero and the average value of B is small relative to A. Hence, absent strong antitrust or intellectual property protections, the A firm can leverage its monopoly into B costlessly by producing a competing version of B and giving it away. For example, Microsoft provided Internet Explorer as a free substitute for Netscape; in our model, this maximizes Microsoft’s joint monopoly profits. Furthermore, Microsoft has no incentive to raise prices, even if all browser competition exits. This may seem surprising since it runs counter to the traditional gains from price discrimination and versioning. We also show that a essential monopolist has no incentive to degrade rival complementary products, which suggests that a monopoly internet service provider will offer net neutrality.
There are other means for the essential A monopolist to capture surplus from B. We consider the incentive to add a surcharge (or subsidy) to the price of B, or to act as a Stackelberg leader. We find a small gain from pricing first, but much greater profits from adding a surcharge to the price of B. The potential for A to capture B’s surplus highlights the challenges facing a firm whose product depends on an essential good.

Are Women Overinvesting in Education? Evidence from the Medical Profession
Joint with Judith Chevalier
Forthcoming: Journal of Human Capital
Abstract:
Recent literature has documented that women earn significantly lower returns than men to investing in professional degrees. However, these papers have not addressed the question of whether this gap is large enough to render professional degrees poor financial investments for women. To study this, we examine whether becoming a physician is a positive net-present-value investment for women. We sidestep some selection issues associated with measuring the returns to education by comparing physicians to physician assistants, a similar profession with lower wages but much lower up-front training costs. We find that the median female (but not male) primary-care physician would have been financially better off becoming a physician assistant. This result is partially due to a gender-wage gap in medicine. However, it is mostly driven by the fact that the median female physician simply doesn't work enough hours to amortize her upfront investment in medical school. In contrast, the median male physician work many more hours, easily enough to amortize his up-front investment. We discuss the robustness of our results to other medical specialties and their relevance to gender-wage gaps more broadly. We discuss other sources of returns to education that rationalize these investments by women.

Intertemporal Choice and Legal Constraints
Joint with Alan Schwartz
Forthcoming: American Law and Economic Review
Abstract:
We study the effect of legal constraints in an environment in which agents face demand shocks they would like to smooth, but also have weakness of will: agents' long and short run preferences are misaligned. Some agents are sophisticated -- they know they will make inconsistent intertemporal choices -- while other agents are naive. The consequent public policy problem is complex. The state should facilitate consumer borrowing to help agents smooth consumption and cushion the effect of shocks, but should also facilitate pre-commitment, to help agents control excessive present-biased preferences. We show that in many simple settings, naive and sophisticated agents make similar consumption/savings choices, which simplifies the policy problem. We also show that all agents borrow when they experience consumption shocks, and that agents with relatively strong present-biased preferences who face relatively mild consumption shocks will borrow to finance excessive current consumption. Other agents save appropriately. Legal constraints that severely restrict agents' access to credit thus would be over-inclusive. Offering agents access to both a liquid and an illiquid savings vehicle appears to be welfare improving relative to either allowing agents complete freedom to borrow or strongly restricting their access to the credit market. Creating and regulating such vehicles are public goods that the market will not supply.

The Evolution of Decision-Making Under Risk: Framing Effects in Monkey Risk Preferences
Joint with Venkat Lakshminarayanan & Laurie Santos
Journal of Experimental Social Psychology, May 2011
Abstract:
When making choices between risky options, human decision-makers exhibit a number of framing effects. One of the most prominent framing effects is the tendency for decisionmakers to evaluate gambles relative to a reference point, and to act risk-seeking when prospects are framed as losses but risk-averse when identical prospects are framed as gains. This tendency for risk-preferences to reverse between loss and gain frames has been termed the reflection effect, and is one of the primary predictions of Prospect Theory. Here, we explore whether non-human primates exhibit a similar reflection effect. Using a token-trading task, we show that capuchin monkeys (Cebus apella) exhibit an analogous reversal of risk preferences depending on whether outcomes are presented as gains or losses, suggesting that similar framing effects also influence choice in non-human primates. This finding suggests that the mechanisms that drive framing effects in humans may be evolutionarily ancient, extending broadly across the primate order.

How to Study Choice-Induced Attitude Change: Strategies for Fixing the Free-Choice Paradigm
Joint with Jane Risen
Social and Personality Psychology Compass, December 2010
Abstract:
The theory of cognitive dissonance has been among the most influential theories in social psychology for the last 50 years. Support for the theory has come primarily from three experimental paradigms: free-choice, induced compliance, and effort justification. Recently, Chen and Risen (2010, Journal of Personality and Social Psychology, 99, 573–594) have argued that although the free-choice paradigm reliably finds a `spreading of alternatives' (i.e., after making a choice, participants' evaluations of the chosen item improve and evaluations of the rejected item decline), these results cannot be interpreted as evidence for dissonance reduction or attitude change. Unlike the other dissonance paradigms, participants `self-select' how they are treated in the free-choice paradigm, making it impossible to know whether spreading is because of the choice process or the information that is revealed about participants’ existing preferences. The current paper has two goals. First, we will describe the criticism developed by Chen and Risen (2010) and situate the criticism within the broader study of dissonance. Second, we will offer four suggestions for how researchers can isolate the effect of the choice process and properly test for choice-induced attitude change in the free-choice paradigm.

How Choice Affects and Reflects Preferences: Revisiting the Free-Choice Paradigm
Joint with Jane Risen
Journal of Personality and Social Psychology, October 2010
Abstract:
After making a choice between two objects, people evaluate their chosen item higher and their rejected item lower (i.e., they "spread" the alternatives). Since Brehm's (1956) initial free-choice experiment, psychologists have interpreted the spreading of alternatives as evidence for choice-induced attitude change. It is widely assumed to occur because choosing creates cognitive dissonance, which is then reduced through rationalization. In this paper, we express concern with this interpretation, noting that the free-choice paradigm (FCP) will produce spreading, even if people's attitudes remain unchanged. Specifically, if people's ratings/rankings are an imperfect measure of their preferences, and their choices are at least partially guided by their preferences, then the FCP will measure spreading, even if people's preferences remain perfectly stable. We show this, first, by proving a mathematical theorem that identifies a set of conditions under which the FCP will measure spreading, even absent attitude change. We then experimentally demonstrate that these conditions appear to hold, and that the FCP measures a spread of alternatives, even when this spreading cannot have been caused by choice. We discuss how the problem we identify applies to the basic FCP paradigm as well as to all variants that examine moderators and mediators of spreading. The results suggest a reassessment of the free-choice paradigm, and perhaps, the conclusions that have been drawn from it.

This paper builds on an earlier working paper:
Rationalization and Cognitive Dissonance: Do Choices Affect or Reflect Preferences?

Is Choice a Reliable Predictor of Choice? A Comment on Sagarin and Skowronski
Joint with Jane Risen
Journal of Experimental Social Psychology, February 2009
Note:
This is a response to a paper published in the JESP, which is a critique of a working paper of mine, "Rationalization and Cognitive Dissonance: Do Choices Affect or Reflect Preferences?". That working paper is here, and the critique of it which I am responding to is here.
Abstract:
In a recent working paper, Chen argues that a methodology central to the cognitive dissonance literature (the free-choice paradigm) has suffered from an inability to separately measure how much choices affect people's preferences, and how much they simply reflect those preferences, by failing to fully control for the fact that subjects tend to choose goods they prefer (Chen 2008). Although Sagarin and Skowronski concede this, they discount Chen's argument, claiming that for revealed preferences to completely account for observed choice-effects the relationship between choice and preference would have to be unrealistically high. In this comment, we argue that their critique both misses the crux of Chen's analysis, and is incorrect. Specifically, to properly test whether choices affect preferences, it is essential that researchers experimentally control for revealed preferences rather than speculate how much of a role they may play. Moreover, Sagarin and Skowronski's critique rests on two fundamental errors—a misunderstanding of the function of the null-hypothesis and a misunderstanding of preference-measurement psychometrics. These errors leads S&S to suggest alternative experimental designs which while a good first step, do not address the problems identified by Chen (2008).

The Evolution of Rational and Irrational Economic Behavior: Evidence and Insight from a Non-human Primate Species
Joint with Laurie Santos
This is a book chapter from Neuroeconomics: Decision Making and the Brain,
edited by Paul Glimcher, Colin Camerer, Ernst Fehr, and Russell Poldrack.
Academic Press: Elsevier, 2009
Note:
The book can be browsed and ordered here, we are chapter 7.

The Endowment Effect in Capuchin Monkeys
Joint with Venkat Lakshminarayanan & Laurie Santos
Philosophical Transactions of the Royal Society: Biological Sciences, December 2008
Abstract:
In humans, the capacity for economically rational choice is constrained by a variety of preference biases: humans evaluate gambles relative to arbitrary reference points; weigh losses heavier than equally sized gains; and demand a higher price for owned goods than for equally preferred goods that are not yet owned. To date, however, fewer studies have examined the origins of these biases. Here, we review previous work demonstrating that human economic biases such as loss aversion and reference dependence are shared with an ancestrally related New World primate, the capuchin monkey (Cebus apella). We then examine whether capuchins display an endowment effect in a token trading task. We identified pairs of treats (fruit discs versus cereal chunks) that were equally preferred by each monkey. When given a chance to trade away their owned fruit discs to obtain the equally valued cereal chunks (or vice versa), however, monkeys required a far greater compensation than the equally preferred treat. We show that these effects are not due to transaction costs or timing issues. These data suggest that biased preferences rely on cognitive systems that are more evolutionarily ancient than previously thought—and that common evolutionary ancestry shared by humans and capuchins may account for the occurrence of the endowment effect in both species.

Modeling a Presidential Prediction Market
Joint with Jonathan E. Ingersoll and Edward H. Kaplan
Management Science, August 2008
Abstract:
Prediction markets now cover many important political events. The 2004 presidential election featured an active prediction market at Intrade.com where securities addressing many different election-related outcomes were traded. Using the 2004 data from this market, we examined three alternative models for these security prices with special focus on the electoral college rules that govern US presidential elections to see which models are more (or less) consistent with the data. The data reveal dependencies in the evolution of the security prices across states over time. We show that a simple diffusion model provides a good description of the overall probability distribution of electoral college votes, while an even simpler ranking model provides excellent predictions of the probability of winning the presidency. Ignoring dependencies in the evolution of security prices across states leads to considerable underestimation of the variance of the number of electoral college votes received by a candidate, which in turn leads to overconfidence in predicting whether or not that candidate wins the election. Overall, the security prices in the Intrade presidential election prediction market appear jointly consistent with probability models that satisfy the rules of the electoral college.

The Taste for Leisure, Career Choice, and the Returns to Education
Joint with Judith Chevalier
Economics Letters, May 2008
Abstract:
We develop a simple methodology to estimate the returns to education despite heterogeneous labor/leisure preferences. The labor supply behavior of doctors and physician assistants is consistent with people choosing between the two careers based on differing tastes for leisure.

This paper previously appeared as the working paper:
The Taste for Leisure, Career Choice, and the Returns to Education: Evidence from the Medical Field
Joint with Judith Chevalier

Do Harsher Prison Conditions Reduce Recidivism? A Discontinuity-Based Approach
American Law and Economics Review Distinguished Article Prize of 2008
Joint with Jesse Shapiro
American Law and Economic Review, June 2007
Abstract:
We estimate the causal effect of prison conditions on recidivism rates by exploiting a discontinuity in the assignment of federal prisoners to security levels. Inmates housed in higher security levels are no less likely to recidivate than those housed in minimum security; if anything, our estimates suggest that harsher prison conditions lead to more post-release crime. Though small sample sizes limit the precision of our estimates, we argue that our findings may have important implications for prison policy, and that our methodology is likely to be applicable beyond the particular context we study.

How Basic are Behavioral Biases? Evidence from Capuchin-Monkey Trading Behavior
Joint with Venkat Lakshminarayanan & Laurie Santos
Journal of Political Economy, June 2006
Abstract:
Behavioral economics has demonstrated systematic decision-making biases in both lab and field data. Do these biases extend across contexts, cultures, or even species? We investigate this question by introducing fiat currency and trade to a colony of capuchin monkeys, and recovering their preferences over a range of goods and gambles. We show that capuchins react rationally to both price and wealth shocks, but display several hallmark biases when faced with gambles, including reference-dependence and loss-aversion. Given our capuchins' inexperience with trade and gambles, these results suggest that loss-aversion extends beyond humans, and may be innate rather than learned.

This paper previously appeared as the working paper:
The Evolution of Our Preferences: Evidence from Capuchin-Monkey Trading Behavior
Joint with Venkat Lakshminarayanan & Laurie Santos

Some Thoughts on the Adaptive Function of Inequity Aversion: An Alternative to Brosnan’s Social Hypothesis
Joint with Laurie Santos
Social Justice Research, June 2006
Abstract:
In this commentary, we review and question Brosnan's hypothesis that inequity aversion (IA) evolved as a domain-specific social mechanism. We then outline an alternative, domain-general, account of IA. As opposed to Brosnan's social hypothesis, we propose that IA evolved from more general reward mechanisms. In particular, we argue reference-dependence and loss-aversion can account for the evolution of IA in primates. We discuss recent work on reference-dependence and explore how it may have given rise to inequality-averse behavior in social settings. We conclude with suggestions for future work examining the proximate mechanisms that give rise to IA.

Modeling Reciprocation and Cooperation in Primates: Evidence for a Punishing Strategy
Joint with Marc Hauser
Journal of Theoretical Biology, May 2005
Quicktime Movie Clip: Tamarins playing games (Tamarins play a repeated game, pulling to provide the other with food)
Abstract:
Experiments in which animals interact strategically with a conspecific or search over some experimentally constructed domain are becoming increasingly common. While these experiments hold the promise of illuminating surprisingly sophisticated behavior, the analysis of the resulting data is often quite coarse. For example, simply tallying the number of observations consistent with a particular behavioral theory fails to utilize systematic variation among observations inconsistent with the theory. Using a new data set generated by cotton-top tamarin monkeys playing a repeated food-exchange game, we apply a maximum-likelihood estimation technique (more commonly used to study human economic behavior) which utilizes much more of the information in these data, and which uncovers unexpectedly sophisticated cooperative behavior from our subjects. Tamarin cooperation remains stable as long as there are no more than two consecutive defections by one player, a strategy that resembles tit-for-two-tats. We present these supplementary results to our previous work on cooperation, detail the basic framework of our data analysis, enumerate the benefits of a maximum-likelihood approach in experimental settings such as ours, and suggest other areas in which these techniques may be fruitful.

Give Unto Others: Genetically Unrelated Cotton-Top Tamarin Monkeys Preferentially Give Food to Those Who Altruistically Give Food Back
Joint with Marc Hauser, Frances Chen & Emmeline Chuang
Proceedings of the Royal Society, Nov 2003
Quicktime Movie Clip: Tamarins playing games (Tamarins play a repeated game, pulling to provide the other with food)
Abstract:
Altruistic food giving among genetically unrelated individuals is rare in nature. The few examples that exist suggest that when animals give food to unrelated others, they may do so on the basis of mutualistic or reciprocally altruistic relationships. We present the results of four experiments designed to tease apart the factors mediating food giving among genetically unrelated cotton-top tamarins [Saguinus oedipus], a cooperatively breeding New World primate. In Experiment 1 we show that individuals give significantly more food to a trained conspecific who unilaterally gives food than to a conspecific who unilaterally never gives food. The apparent contingency of the tamarins’ food giving behavior motivated the design of Experiments 2-4. Results from all three experiments show that altruistic food giving is mediated by prior acts of altruistic food giving by a conspecific. Specifically, tamarins do not give food to unrelated others when the food received in the past represents the byproduct of another’s selfish actions (Experiments 2,3) or when a human experimenter gives them food (Experiment 4) as did the unilateral altruist in Experiment 1. In contrast, if one tamarin gives another food without obtaining any immediate benefit, then the recipient is more likely to give food in return. Overall, these results provide clear evidence of altruistic food giving among genetically unrelated individuals, indicate that tamarins discriminate between altruistic and selfish actions, and provide the necessary foundation for the evolution of reciprocal altruism.