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Decision Making Costs and Problem Solving Performance

  • Tanga McDaniel

    ()

  • E. Rutström

We report the results from an experimental study of how problem solving behavior is affected by financial rewards. We formulate three alternative hypotheses: costly rationality, extrinsic/intrinsic trade-off, and distraction effects. Subjects play a computerized version of the Tower-of-Hanoi game and report their beliefs about the optimal solution through a quadratic scoring rule. Subjects participate in one of two treatments: a high penalty and a low penalty. We find that eliciting beliefs, in addition to observing playing behavior, reveals useful information about subjects' cognitive behavior. We reject our hypothesis that the increase in the extrinsic penalty affects the intrinsic valuation in such a way as to decrease the amount of effort applied. Copyright Kluwer Academic Publishers 2001

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File URL: http://hdl.handle.net/10.1023/A:1011480621103
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Article provided by Springer in its journal Experimental Economics.

Volume (Year): 4 (2001)
Issue (Month): 2 (October)
Pages: 145-161

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Handle: RePEc:kap:expeco:v:4:y:2001:i:2:p:145-161
Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=102888

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  1. Smith, Vernon L & Walker, James M, 1993. "Monetary Rewards and Decision Cost in Experimental Economics," Economic Inquiry, Western Economic Association International, vol. 31(2), pages 245-61, April.
  2. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
  3. Harrison, Glenn W, 1992. "Theory and Misbehavior of First-Price Auctions: Reply," American Economic Review, American Economic Association, vol. 82(5), pages 1426-43, December.
  4. Pingle, Mark, 1992. "Costly optimization: an experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 17(1), pages 3-30, January.
  5. Winston, Gordon C., 1989. "Imperfectly rational choice : Rationality as the result of a costly activity," Journal of Economic Behavior & Organization, Elsevier, vol. 12(1), pages 67-86, August.
  6. Smith, Vernon L, 1982. "Microeconomic Systems as an Experimental Science," American Economic Review, American Economic Association, vol. 72(5), pages 923-55, December.
  7. Camerer, Colin F. & Hogarth, Robin M., 1999. "The Effects of Financial Incentives in Experiments: A Review and Capital-Labor-Production Framework," Working Papers 1059, California Institute of Technology, Division of the Humanities and Social Sciences.
  8. Smith, Vernon L & Walker, James M, 1993. "Rewards, Experience and Decision Costs in First Price Auctions," Economic Inquiry, Western Economic Association International, vol. 31(2), pages 237-45, April.
  9. Heiner, Ronald A., 1988. "The necessity of imperfect decisions," Journal of Economic Behavior & Organization, Elsevier, vol. 10(1), pages 29-55, July.
  10. Wilcox, Nathaniel T, 1993. "Lottery Choice: Incentives, Complexity and Decision Time," Economic Journal, Royal Economic Society, vol. 103(421), pages 1397-1417, November.
  11. Conlisk, John, 1988. "Optimization cost," Journal of Economic Behavior & Organization, Elsevier, vol. 9(3), pages 213-228, April.
  12. Harrison, Glenn W, 1989. "Theory and Misbehavior of First-Price Auctions," American Economic Review, American Economic Association, vol. 79(4), pages 749-62, September.
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