Do negative economic shocks affect cognitive function, adherence to social norms and loss aversion?

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.

Negative shocks predict change in cognitive function and preferences: assessing the negative affect and stress hypothesis

“…Risk Taking measures how much the participant is willing to take risks; Time discounting the willingness to give up something today in order to benefit from that in the future; Trust is the propensity to assume that people have only the best intentions; Altruism 1 is the share of a windfall endowment that the participant would be ready to share; Altruism 2 is participant's willingness to share with others without expecting anything in return; Positive reciprocity is the choice (among six options) of a thank-you gift; Negative reciprocity is the willing to punish unfair behavior even if this is costly. www.nature.com/scientificreports/ This study has implications for the literature on the study of shocks because it provides evidence with plausible external validity, which complements the results of experiments where shocks are randomly administered but in a less externally valid setting 19 . If we assume that preferences have an idiosyncratic component which is subject to shocks, we show what is the direction of the effect of those shocks, and this has important implications for the literature on endogenous preferences 52 , the classic claim of which is that institutional settings have long-term implications for the evolution of values and tastes.…”

“…The wave one questionnaire included socio-demographics, self-reported health status, labor market status, and exposure to shock (SOM, Sect. 2 [18][19][20][21]27,[24][25][26]. Wave one is described and analyzed in Codagnone et al 46 .…”

“…Studies have shown that economic shocks have a negative impact on cognitive function and a positive impact on time discounting, risk aversion and social preferences. To begin with the effect of shocks on cognitive function, some of the evidence comes from laboratory experiments where shocks are induced as losses over a Real Effort Task 19 , and where shocks are measured as large income windfalls for sugar cane farmers in rural India 16 . No effect was found for paycheck natural variations 20 , although in the latter case the shock is temporary, expected, and expected to be temporary.…”

Restarting “Normal” Life after Covid-19 and the Lockdown: Evidence from Spain, the United Kingdom, and Italy

“…The literature shows that large variations of income for sugar cane farmers induce a cognitive toll (Mani et al, 2014 ). Laboratory experiments where shocks are induced as losses on accumulated earnings from a Real Effort Task confirm this evidence (Bogliacino and Montealegre 2020 ). It has been argued that this cognitive toll makes people concentrate on the worries, distracting attention from the ongoing decisions, which may induce counterproductive behaviour, such as lack of adherence to medication, unsafe sex, inability to comply with saving plans, procrastination etc.…”

Investigating COVID‐19 stress and coping: Substance use and behavioural disengagement

“…Since the pandemic is ongoing and cannot be controlled by the individual, the predominant coping form during COVID‐19 should be emotion‐focused. In recent research COVID‐19 results in several negative shocks defined as losses of income, assets and health (Bogliacino et al, 2021 ; Bogliacino & Montealegre, 2020 ). Integrating the experience of stress with cognitive functioning, this research shows that the effects of negative shocks, due to COVID‐19, have taxed cognitive function, as documented by experimental and correlational evidence.…”