Do negative economic shocks affect cognitive function, adherence to social norms and loss aversion?
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Do negative economic shocks affect cognitive function, adherence to social norms and loss aversion? Francesco Bogliacino1,2 · Felipe Montealegre1 Received: 2 November 2019 / Revised: 2 July 2020 / Accepted: 13 July 2020 © Economic Science Association 2020
Abstract Households are frequently subject to income and asset shocks. We performed a lab experiment, inducing losses on a real effort task, after which we measured cognitive performance, loss aversion and cheating behavior. We found that asset losses, but not income losses, act as a cognitive load, by decreasing accuracy and increasing response times. We did not detect any change in dishonesty or loss aversion. Keywords Cognitive function · Cheating · Social norm · Loss aversion · Negative shock · Income · Asset JEL classification C91 · D91 · D81
1 Introduction In both developed and developing countries, it is common for households to face sudden negative changes to their income and wealth. Economists call these Negative Economic Shocks (NES). They can occur in the form of either Negative Income Shocks (NIS), when income flows such as earnings are negatively affected by an event, or Negative Wealth Shocks (NWS), when the value of accumulated assets is reduced. We wish to understand how negative income and wealth shocks affect cognitive function, whether this cognitive toll affects preferences toward risk in the loss
Electronic supplementary material The online version of this article (https://doi.org/10.1007/s4088 1-020-00091-4) contains supplementary material, which is available to authorized users. * Francesco Bogliacino [email protected] 1
Centro de Investigaciones para el Desarrollo, Universidad Nacional de Colombia, Bogotá, Colombia
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Facultad de Ciencias Economicas, Universidad Nacional de Colombia, Bogotá, Colombia
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domain and cheating, and whether asset or earning losses have similar consequences (to date they are treated interchangeably in the literature). To address these questions, we perform an incentivized controlled experiment. We randomly induce NIS and NWS to participants, by altering either the pay rate of a two-round Real Effort Task (RET), or the accumulated earnings from the first to the second round. We then measure fluid intelligence, short-term memory, cheating, and loss aversion. Cognitive function is the ability to process information to perform the tasks of reasoning, comprehension and learning, and which require a reliance on processes that are neither automatic nor based on instinct (Baddeley and Hitch 1974; Diamond 2013). It is recognized that the human cognitive system has a limited capacity (Kahneman 2011). As a result, differences in cognitive function determine the capacity for information processing and the performance of subjects in decision tasks. NES are expected to act as a cognitive load. This is consistent with the findings of Mani et al. (2013), who find that inducing scarcity in the lab through priming financial worries or exploiting a natura
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