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This book is a collection of important contributions by Japanese researchers and their coauthors to present current advances in behavioral economics and finance, particularly in relation to decision making and human well-being. The topics covered in this volume include decision making under the conditions of inter-temporal choices, risk and social relations, happiness and the neuro-scientific/biological basis of behavior. The book includes works of research, both theoretical and empirical, on time discounting, time preferences, risk aversion, altruism, social status, happiness, addiction, limited attention and health and financial investments. The authors of the chapters add supplementary discussions to survey more recent advances on related topics or to provide detailed information that were abbreviated in the original publications. The addenda will enable readers to deepen their understanding of decision making and human well-being.



Attitude Toward Risk and Time


Chapter 1. Risk and Time Preferences: Linking Experimental and Household Survey Data from Vietnam

We conducted experiments in Vietnamese villages to determine the predictors of risk and time preferences. In villages with higher mean income, people are less loss-averse and more patient. Household income is correlated with patience but not with risk. We expand measurements of risk and time preferences beyond expected utility and exponential discounting, replacing those models with prospect theory and a three-parameter hyperbolic discounting model. Comparable risk parameter estimates have been found for Chinese farmers, using our method.
Tomomi Tanaka, Colin F. Camerer, Quang Nguyen

Chapter 2. Simultaneous Measurement of Time and Risk Preferences: Stated Preference Discrete Choice Modeling Analysis Depending on Smoking Behavior

Measuring time and risk preferences and relating them to economic behaviors are important topics in behavioral economics. We developed a new method to simultaneously measure the rate of time preference and the coefficient of risk aversion. Analyzing the individual-level relationships between preference parameters and cigarette smoking, we conclude that current smokers are more impatient and risk-prone than non-smokers. Heavy smokers are the most impatient and risk-prone, while ex-smokers are the most patient and risk-averse. Among non-smokers, neither age-related nor gender-related differences were found. On the other hand, risk and time preferences are significantly different according to age and gender for smokers.
Takanori Ida, Rei Goto

Chapter 3. Time Discounting: Declining Impatience and Interval Effect

Most studies have not distinguished delay from intervals, so that whether the declining impatience really holds has been an open question. We conducted an experiment that explicitly distinguishes them, and confirmed it at short delay such as less than 8-week delay. This implies that people make dynamically inconsistent plans. We also found the interval effect that the time discount rate decreases with prolonged intervals. We show that the interval and the magnitude effects are caused because intertemporal choice is made partially based on the differential in reward amount, while Weber’s law explains neither the delay nor the interval effects sufficiently.
Yusuke Kinari, Fumio Ohtake, Yoshiro Tsutsui

Chapter 4. Non-parametric Test of Time Consistency: Present Bias and Future Bias

This chapter reports the elicited time preference of human subjects in a laboratory setting. The model allows for non-linear utility functions, non-separability between delay and reward, and time inconsistency including future bias in addition to present bias. In particular, the experiment (1) runs a non-parametric test of time consistency and (2) estimates the form of time discount function independently of instantaneous utility functions, and then (3) the result suggests that many subjects exhibiting future bias, indicating an inverse S-curve time discount function .
Kan Takeuchi

Chapter 5. Loss of Self-Control in Intertemporal Choice May Be Attributable to Logarithmic Time-Perception

Impulsivity and loss of self-control in drug-dependent patients have been associated with the manner in which they discount delayed rewards. Although drugs of abuse have been shown to modify perceived time duration, little is known regarding the relationship between impulsive decision-making in intertemporal choice and estimation of time-duration. In classical economic theory, it has been hypothesized that people discount future reward value exponentially. In exponential discounting, a temporal discounting rate is constant over time, which has been referred to as dynamic consistency. However, accumulating empirical evidence in biology, psychopharmacology, behavioral neuroscience, and neuroeconomics does not support the hypothesis. Rather, dynamically inconsistent manners of discounting delayed rewards, e.g., hyperbolic discounting, have been repeatedly observed in humans and non-human animals. In spite of recent advances in neuroimaging and neuropsychopharmacological study, the reason why humans and animals discount delayed rewards hyperbolically is unknown. In this study, we hypothesized that empirically-observed dynamical inconsistency in intertemporal choice may result from errors in the perception of time duration. It is proposed that perception of temporal duration following Weber’s law might explain the dynamical inconsistency. Possible future study directions for elucidating neural mechanisms underlying inconsistent intertemporal choice are discussed.
Taiki Takahashi

Chapter 6. Experiments on Risk Attitude: The Case of Chinese Students

This chapter examines Chinese students’ risk attitudes using selling and buying experiments with lotteries. We found that subjects were more risk averse during the buying experiment than during the selling experiment, suggesting an endowment effect. In the selling experiment, subjects were risk loving when there was a low win probability and risk averse with a high win probability, whereas they were risk averse in the buying experiment. Using the prize money won during the experiment as a measure of wealth, we found decreasing absolute risk aversion. Subjects’ risk attitudes as revealed in the experiments explain their risky asset holding behavior.
Shunichiro Sasaki, Shiyu Xie, Fumio Ohtake, Jie Qin, Yoshiro Tsutsui



Chapter 7. Interdependency Among Addictive Behaviours and Time/Risk Preferences: Discrete Choice Model Analysis of Smoking, Drinking, and Gambling

This chapter simultaneously measures the rate of time preference and the coefficient of risk aversion, as well as investigates the interdependencies of four addictive behaviours: smoking, drinking, pachinko (a popular Japanese form of pinball gambling), and horse betting among a sample of the Japanese population. We reach two main conclusions. First, there are significant interdependencies among the four addictive behaviours, in particular between smoking and drinking and between gambling on pachinko and the horses. Second, we conclude that the higher the time preference rate and the lower the risk aversion coefficient becomes, the more likely individuals smoke, drink frequently, and gamble on pachinko and the horses.
Takanori Ida, Rei Goto

Chapter 8. Discounting Delayed and Probabilistic Monetary Gains and Losses by Smokers of Cigarettes

Rationale: Nicotine dependence has been associated with impulsivity and discounting delayed/uncertain outcomes. Objectives: This study had two main objectives: (1) to examine the relationship between the number of cigarettes consumed per day and the degree to which delayed and uncertain monetary gains and losses are discounted by smokers, and (2) to determine the relationship between the estimated dose of nicotine intake per day and the degree to which four types of discounting occur. Methods: Twenty seven habitual smokers and 23 never smokers participated in this experiment. They were required to choose between immediate and delayed monetary rewards (or losses), or between guaranteed and probabilistic rewards (or losses). Results: The degree to which delayed monetary gains were discounted was significantly and positively correlated with both the number of cigarettes smoked and the estimated dose of nicotine intake per day. Conversely, there was no relationship between smoking and the remaining three types of discounting. Also, mild smokers in our sample did not differ from never smokers in discounting monetary gains or losses. Conclusions: In general, our results suggest that both the frequency of nicotine self-administration, as well as the dosage, are positively associated with greater delay discounting of gains. One neuropsychopharmacological explanation for this effect is that chronic nicotine intake may induce neuroadaptation of the neural circuitry involved in reward processing.
Yu Ohmura, Taiki Takahashi, Nozomi Kitamura

Chapter 9. Time Discounting and Smoking Behavior: Evidence from a Panel Survey

By using a panel survey of Japanese adults, we show that smoking behavior is associated with personal time discounting and its biases, such as hyperbolic discounting and the sign effect, in the way that theory predicts: smoking depends positively on the discount rate and the degree of hyperbolic discounting and negatively on the presence of the sign effect. Positive effects of hyperbolic discounting on smoking are salient for naïve people, who are not aware of their self-control problem. By estimating smoking participation and smokers’ cigarette consumption in Cragg’s two-part model, we find that the two smoking decisions depend on different sets of time-discounting variables. Particularly, smoking participation is affected by being a naïve hyperbolic discounter, whereas the discount rate, the presence of the sign effect, and a hyperbolic discounting proxy constructed from sign effect behavior vis-à-vis doing homework assignments affect both types of decision making. The panel data enable us to analyze the over-time instability of elicited discount rates. The instability is shown to come from measurement errors, rather than preference shocks on time preference. Several evidences indicate that the detected associations between time preferences and smoking behavior are inter-personal one, rather than within-personal one.
Myong-Il Kang, Shinsuke Ikeda

Chapter 10. Smokers, Smoking Deprivation, and Time Discounting

This chapter investigates whether smokers exhibit greater time discounting than non-smokers, and how short-term nicotine deprivation affects time discounting. A unique feature of our experiment is that our subjects receive rewards not only of money, but also of actual tobacco. This is done in order to elicit smokers’ true preferences. Smokers are more impatient than non-smokers, consistent with previous studies. Additionally, nicotine deprivation makes smokers even more impatient. These results suggest that nicotine concentration has different effects on time preferences in the short and long runs.
Shoko Yamane, Hiroyasu Yoneda, Taiki Takahashi, Yoshio Kamijo, Yasuhiro Komori, Fumihiko Hiruma, Yoshiro Tsutsui

Chapter 11. The Effects of the Social Norm on Cigarette Consumption: Evidence from Japan Using Panel Data

Using Japan’s prefecture-level panel data from 1989 to 2001, this chapter examines the influence of the social norm on a person’s smoking behavior when the complementary relationship between smoking and drinking is taken into account. The key findings through a dynamic panel model controlling for unobserved prefecture-specific fixed effects are as follows: (1) Influence from others is stronger when people live more closely and cohesively. A tightly knit society results in a reduction of smoking through smoking-related interaction. (2) Smoking and drinking have a complementary relationship: greater initial consumption of alcohol results in larger consumption of cigarettes. (3) The complementary relationship between smoking and drinking is attenuated if the cost of committing the annoying conduct (i.e., smoking) is high.
Overall, this empirical study provides evidence that the psychological effect of the presence of surrounding people has a direct significant effect upon smoking behavior and, furthermore, that it attenuates the complementary relationship between smoking and drinking, thereby reducing cigarette consumption. These results indicate that not only formal rules but also tacitly formed informal norms are effective deterrents to smoking.
Eiji Yamamura



Chapter 12. Hyperbolic Discounting, the Sign Effect, and the Body Mass Index

Analysis of a broad survey of Japanese adults confirms that time discounting relates to body weight, not only via impatience, but also via hyperbolic discounting, proxied by inclination toward procrastination, and the sign effect, where future negative payoffs are discounted at a lower rate than future positive payoffs. Body mass index is positively associated with survey responses indicative of impatience and hyperbolic discounting, and negatively associated with those indicative of the sign effect. A one-unit increase in the degree of procrastination is associated with a 2.81 percentage-point increase in the probability of being obese. Subjects exhibiting the sign effect show a 3.69 percentage-point lower probability of being obese and a 4.02 percentage-point higher probability of being underweight than those without the sign effect. These effects are substantial compared with the prevalence rates of the corresponding body mass status. Obesity and underweight thus result in part from the temporal decision biases.
Shinsuke Ikeda, Myong-Il Kang, Fumio Ohtake

Chapter 13. Economic and Behavioral Factors in an Individual’s Decision to Take the Influenza Vaccination in Japan

In this chapter, we investigate what people in Japan consider when deciding to take the influenza vaccination. We develop an economic model to explain the mechanism by which people decide to take the influenza vaccination. Using our model and the data obtained from a large-scale survey we conducted in Japan, we demonstrated that people make rational decisions about vaccinations after considering its cost and benefits. People consider the probability of infection, severity of the disease, and the vaccination’s effectiveness and side effects. The time discount rate is another consideration because the timing of costs and benefits of the vaccination differ. Risk aversion (fearing the contraction of the flu and vaccination’s side effects) also affects the decision. People also deviate from rationality—altruism and status quo bias play important roles in the decision-making. Overconfidence indirectly affects the decision via perception variables such as the subjective probability of infection and assessment of influenza’s severity. The decision also depends on attributes such as gender, age, and marital status. If the general perception of flu and vaccination is inaccurate, supplying accurate information regarding those may increase or decrease the vaccination rate, depending on whether this perception is, respectively, higher or lower than the objective rates. Thus, we examine whether the general perception is biased. Our survey suggests that disseminating information on the vaccination’s effectiveness may increase the rate of vaccination, whereas that on the probability of infection may have the opposite effect.
Yoshiro Tsutsui, Uri Benzion, Shosh Shahrabani

Social Preferences


Chapter 14. Another Avenue for Anatomy of Income Comparisons: Evidence from Hypothetical Choice Experiments

We propose a new avenue for studying income comparisons effects, namely hypothetical discrete choice experiments in which respondents are presented with alternative combinations of hypothetical monthly income amounts, both for themselves and certain reference persons. With this experimental method we can avoid the problems associated with researcher-imposed reference persons’ incomes that are found in most of the happiness studies testing comparison effects. This approach allows investigation of the differences in comparison effects across types of reference groups as well as respondents’ individual characteristics, including specific comparison benchmarks, which are the main open questions in the literature. Some results from our original, large-scale, Internet-based survey are provided.
Katsunori Yamada, Masayuki Sato

Chapter 15. Social Capital, Household Income, and Preferences for Income Redistribution

This chapter explores how social capital influences individual preferences for income redistribution. Social capital is measured by participation in community activities. After controlling for individual characteristics, I find that people are more likely to express preferences for income redistribution in areas with higher rates of community participation. This is more clearly so in high-income groups than in low-income groups. I infer that individuals’ preferences for income redistribution are influenced by psychological externalities. Because the data is from surveys, I also consider the role of expressive behavior. I also consider the hypothesis that behavior is influenced by social distance.
Eiji Yamamura

Happiness and Well-Being


Chapter 16. Koizumi Carried the Day: Did the Japanese Election Results Make People Happy and Unhappy?

This chapter investigates whether Japanese people were happy and unhappy with the general election conducted on September 11, 2005, in which the Prime Minister, Koizumi, won a landslide victory. We conducted a large survey just after the election to ask people how happy they were and which party they had supported. Although there are consistent tendencies that supporters of ruling parties were happier and supporters of opposition parties were unhappier, the effect was not significant. Considering the results of previous studies that showed that Americans demonstrated significant responses to the result of a presidential election, this study suggests that Japanese people are indifferent to politics.
Yoshiro Tsutsui, Miles Kimball, Fumio Ohtake

Chapter 17. Asking About Changes in Happiness in a Daily Web Survey and Its Implication for the Easterlin Paradox

This chapter investigates whether the level of happiness and integrated process of changes in happiness are the same. Using the daily data of two waves of 4 and 6 months each, we found that the level of happiness is stationary, whereas the integrated process of changes is non-stationary with a rising trend, implying that they are different series. An examination of the causes of the difference indicated that although adaptation completely influences the level of happiness, it only partially influences the change in happiness. This may be because the latter is based on a comparison between today and yesterday,
Yoshiro Tsutsui, Fumio Ohtake

Chapter 18. Welfare States and the Redistribution of Happiness

We use data from the 2002 International Social Survey Programme, with roughly 42,000 individuals nested within 29 countries, to examine the determinants of happiness in a comparative perspective. We hypothesize that social democratic welfare states redistribute happiness among policy-targeted demographic groups in these countries. The redistributive properties of the social democratic welfare states generate an alternate form of “happiness inequality” in which winners and losers are defined by marital status, presence of children and income. We apply multilevel modeling and focus on public social expenditures (as percentage of GDP) as proxy measures of state intervention at the macro-level, and happiness as the specific measure of welfare outcome at the micro-level. We find that aggregate happiness is not greater in the social democratic welfare states, but happiness closely reflects the redistribution of resources in these countries. Happiness is redistributed from low-risk to high-risk individuals. For example, women with small children are significantly happier, but single persons are significantly less happy in the welfare states. This suggests that pro-family ideology of the social democratic welfare states protects families from social risk and improves their well-being at the cost of single persons. Further, we find that the happiness gap between high versus low-income earners is considerably smaller in the social democratic welfare states, suggesting that happiness is redistributed from the privileged to the less privileged.
Hiroshi Ono, Kristen Schultz Lee



Chapter 19. Revealed Attention

The standard revealed preference argument relies on an implicit assumption that a decision maker considers all feasible alternatives. However, the marketing and psychology literatures provide well-established evidence that consumers do not consider all brands in a given market before making a purchase (Limited Attention). In this chapter, we illustrate how one can deduce both the decision maker’s preference and the alternatives to which she pays attention and inattention from the observed behavior. We illustrate how seemingly compelling welfare judgements without specifying the underlying choice procedure are misleading. Further, we provide a choice theoretical foundation for maximizing a single preference relation under limited attention.
Yusufcan Masatlioglu, Daisuke Nakajima, Erkut Y. Ozbay

Chapter 20. Subjective Random Discounting and Intertemporal Choice

This chapter provides an axiomatic foundation for a particular type of preference shock model called the random discounting representation where a decision maker believes that her discount factors change randomly over time. For this purpose, we formulate an infinite horizon extension of Dekel, Lipman, and Rustichini (Econometrica 69:891–934, 2001), and identify the behavior that reduces all subjective uncertainties to those about future discount factors. We also show uniqueness of subjective belief about discount factors. Moreover, a behavioral comparison about preference for flexibility characterizes the condition that one’s subjective belief second-order stochastically dominates the other. Finally, the resulting model is applied to a consumption-savings problem.
Youichiro Higashi, Kazuya Hyogo, Norio Takeoka

Chapter 21. A Geometric Approach to Temptation

We provide a simple geometric proof of the Gul and Pesendorfer’s (Econometrica 69(6):1403–1435, 2001) utility representation theorem about choice under temptation without self-control. We extract two incomplete orders from preferences: temptation relation and resistance relation. We characterize those relations geometrically and obtain temptation utility using a separation method à la Aumann (Econometrica 30(3):445–462, 1962).
Koji Abe

Biological Foundation


Chapter 22. Prediction of Immediate and Future Rewards Differentially Recruits Cortico-Basal Ganglia Loops

Evaluation of both immediate and future outcomes of an action is a critical requirement for intelligent behavior. We investigated brain mechanisms for reward prediction at different time scales in an fMRI experiment using a Markov decision task. When subjects learned actions from immediate rewards, significant activity was found in the lateral orbitofrontal cortex and the striatum. When subjects learned to acquire large future rewards despite small immediate losses, the dorsolateral prefrontal cortex, inferior parietal cortex, dorsal raphe nucleus, and cerebellum were also activated. Computational model-based regression analysis using the predicted future rewards and prediction errors estimated from subjects’ performance data revealed graded maps of time scale within the insula and the striatum, where ventroanterior parts were responsible for predicting immediate rewards and dorsoposterior parts for future rewards. These results suggest differential involvement of the cortico-basal ganglia loops in reward prediction at different time scales.
Saori C. Tanaka, Kenji Doya, Go Okada, Kazutaka Ueda, Yasumasa Okamoto, Shigeto Yamawaki

Chapter 23. Second-to-Fourth Digit Ratio and the Sporting Success of Sumo Wrestlers

The second (index finger) to fourth (ring finger) digit length ratio (2D:4D) is known to be a putative marker of prenatal exposure to testosterone. It has been reported that fetal and adult testosterone may be critical for development of physical and mental traits such as cardiovascular system, reaction time, aggressiveness, and masculinity. Testosterone-driven attributes are associated with success in male-to-male physical competition, which may be proxied by ability in sports. Many researchers have found that 2D:4D is sexually dimorphic and a negative correlate of athletic performance. This study aims to investigate the associations of 2D:4D with measures of power as another possible testosterone-associated trait, using ability in sumo wrestling as a proxy for male physical competiveness. The measures of sumo performance comprised the sumo ranks and winning percentages of 142 Japanese professional sumo wrestlers. We found that sumo wrestlers with low 2D:4D had higher sumo ranks and better winning records. The significant negative associations between 2D:4D and the athletic prowess of sumo wrestlers provide further evidence of the possible link between high testosterone levels and muscle strength. The relatively small effect sizes found in this study, however, imply that 2D:4D may be a weaker predictor for sports requiring explosive power than for those requiring endurance.
Rie Tamiya, Sun Youn Lee, Fumio Ohtake

Investor Behavior


Chapter 24. Investors’ Herding on the Tokyo Stock Exchange

Herding occurs when a group of investors intensively buy or sell the same stock at the same time. This study examines the tendency of individual, institutional and foreign investors to herd in Japan, where the yearly change in ownership is used as a proxy for investor herding. Using 20 years of aggregate data, we examine how investor herding is related to stock return performance around the herding interval. Both institutional and foreign investor herding impact stock prices. Further, Japanese institutional investors seem to follow positive-feedback trading strategies, and subsequent return reversals imply that these investors’ trades destabilize stock prices. On the other hand, foreign investors’ trades are related to information. Our results are robust to the effect of firm size, to portfolio formation methods, to initial ownership levels, and to the chosen time period.
Yoshio Iihara, Hideaki Kato, Toshifumi Tokunaga

Chapter 25. The Characteristics of Online Investors

Using survey data, we explore the characteristics of Japanese online investors. Our main findings are as follows. First, young men are more likely to engage in online trading. Second, employed investors trade online more frequently, implying that proximity to the information network of the workplace affects investor decisions to trade online. Third, we do not find that investors who are more satisfied with their past returns tend to invest online more often. Thus, the self-attribution bias is not supported for Japanese online traders. Finally, Japanese online investors prefer capital gains, do not prefer low-volatility stocks, refer to chart data, make investment decisions more frequently, and tend to choose stocks to buy and sell on their own. These characteristics of Japanese online investors are consistent with those of overconfident investors.
Konari Uchida

Chapter 26. Can Margin Traders Predict Future Stock Returns in Japan?

A growing body of literature suggests that investor sentiment affects stock prices both at the firm level and at the market level. This study examines the relationship between investor behavior and stock returns focusing on Japanese margin transactions using weekly data from 1994 to 2003. Margin trading is dominated by individual investors in Japan. In analysis at the firm level, we find a significant cross-sectional relationship between margin buying and stock returns. Both market-level and firm-level analyses show that margin buying traders follow herding behavior. They seem to follow positive feedback trading behavior for small-firm stocks and negative feedback trading behavior for large firm stocks. Our results show that information about margin buying helps predict future stock returns, especially for small-firm stocks at short horizons. The predictive power does not diminish even after controlling for firm size and liquidity.
Takehide Hirose, Hideaki Kiyoshi Kato, Marc Bremer


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