The endowment effect and intertemporal choice: a laboratory investigation

We present a laboratory investigation of intertemporal choice (i.e., elicited discount rates) allowing for the influence of the endowment effect. Consistent with the previous literature, we hypothesize that the endowment effect in an intertemporal choice setting results in substantially higher discount rates relative to when individuals treat the resources in question as found money. Our results support this hypothesis and our experimental design provides a new protocol for conducting choice experiments wherein the endowment effect is an important determinant of behaviour.     

Self-tuning experience weighted attraction learning in games

Self-tuning experience weighted attraction (EWA) is a one-parameter theory of learning in games. It addresses a criticism that an earlier model (EWA) has too many parameters, by fixing some parameters at plausible values and replacing others with functions of experience so that they no longer need to be estimated. Consequently, it is econometrically simpler than the popular weighted fictitious play and reinforcement learning models. The functions of experience which replace free parameters “self-tune” over time, adjusting in a way that selects a sensible learning rule to capture subjects’ choice dynamics. For instance, the self-tuning EWA model can turn from a weighted fictitious play into an averaging reinforcement learning as subjects equilibrate and learn to ignore inferior foregone payoffs. The theory was tested on seven different games, and compared to the earlier parametric EWA model and a one-parameter stochastic equilibrium theory (QRE). Self-tuning EWA does as well as EWA in predicting behavior in new games, even though it has fewer parameters, and fits reliably better than the QRE equilibrium benchmark.     

When a Precedent of Donation Favors Defection in the Prisoner's Dilemma

Abstract. In this paper, we examine the question of whether a collective activity can influence cooperation in a subsequent repeated one‐shot prisoner's dilemma (PD) game. We conduct two series of experiments. The first consists of control experiments in which 30 periods of a PD game are played, with a random rematching of the pairs in every period. In a second series of experiments, subjects first play a donation game (DG) and then the PD game. In the DG, they collectively discuss the amount of a donation to a given charity, before putting the question to an individual and anonymous vote. Cooperation levels in the PD games preceded by the DG are significantly lower than those observed in the control experiment.     

Trust as belief or behavior?

Despite its proposed importance for economic performance, there seems to be little agreement on what trust really is. In economics, trust is generally viewed as a belief regarding the action that is to be expected from others. This contrasts with the view that trust is a way of acting. In his influential book on the nature of explanation in the social sciences, Jon Elster argues that trusting is to act with few precautions. I argue that it is possible to reconcile these seemingly conflicting views about trust. I develop a simple model of trust where both beliefs and precautions play an important role – and where Elster’s understanding of trust can be viewed as a special case.     

AN EXPERIMENT ON CORRUPTION AND GENDER

A number of papers with field data have found differences in the corrupt activities of males and females; nonetheless they have drawbacks that may be overcome in a laboratory experiment. The aim of this paper is to see experimentally whether women and men, facing the same situation behave in a different way, as suggested in the field‐data studies or, on the contrary, whether they behave in the same way. The results found in the experiment show that women are indeed less corrupt than men.     

Does truth win when teams reason strategically?

We study behavior in the race game with the aim of assessing whether teams can create synergies. The race game has the advantage that the optimal strategy depends neither on beliefs about other players nor on distributional or efficiency concerns. Our results reveal that teams not only outperform individuals but that they can also beat the “truth-wins” benchmark. In particular, varying the length of the race game we find that the team advantage increases with the complexity of the game.     

Modeling Expectation Formation Involving Several Sources of Information

Abstract. Experimental studies of expectation formation of subjects are predominantly limited to the prediction of one single time series despite the practical relevance of expectations in situations with multiple sources of information. In this paper, we report on an experiment in which subjects are given time series (indicators) as additional information for the judgemental forecast of a stationary time series. The quality and the number of these indicators are varied in three versions of a forecasting experiment. We explore the effects on forecasting accuracy and we test the average forecasts of the subjects for consistency with the rational expectations hypothesis. A simple heuristic is presented that explains the average forecasting behavior better than the rational expectations if indicators are presented to the subjects. It is demonstrated by a simulation study that this result is representative for the considered stationary stochastic processes.     

A comment on “School choice: An experimental study” [J. Econ. Theory 127 (1) (2006) 202-231]

We show that one of the main results in Chen and Sönmez (2006, 2008) [6] and [7] does no longer hold when the number of recombinations is sufficiently increased to obtain reliable conclusions. No school choice mechanism is significantly superior in terms of efficiency.     

An experimental investigation of entry cost effects in sealed-bid dollar auctions

We experimentally study the effect of entry costs on bidding and entry behavior in common value auctions. We find, with entry costs, players bid lower in first price and higher in second price auctions, compared to no entry fee auctions.     

Risk taking by agents: The role of ex-ante and ex-post accountability

We study the role of accountability in situations where an agent makes risky decisions for a principal. We observe that in the absence of accountability, agents choose less risk averse investments for the principal than investors who invest for their own account. Accountability mitigates the observed decrease in risk aversion. Differences are observed between situations where agents are accountable for their decision (“ex-ante”) and where they are accountable for the outcome (“ex-post”).     

Theories of behavior in principal-agent relationships with hidden action

In a laboratory experiment, we investigate behavior in a principal-agent situation with moral hazard. We evaluate the predictive success of two theories. One is the standard agency theory, which assumes that the agent will accept any contract offer that satisfies his participation constraint, typically requiring zero expected utility. The other is the “fair-offer” theory suggested by Keser and Willinger [2000. Principals’ principles when agents’ actions are hidden. International Journal of Industrial Organization 18 (1), 163-185], which requires that the principal provide full insurance against losses to the agent and leave him a share of at most 50% of the generated surplus. The treatment variable of our experiment is the cost of effort. As effort costs increase, expected net surplus of a contract decreases. We observe that fair-offer theory generally predicts observed contract offers better than standard agency theory. However, the predictive success of the fair-offer theory decreases, while the one of standard agency theory increases with decreasing expected net surplus.     

Bidding behavior in asymmetric auctions: An experimental study

We review an asymmetric auction experiment. Based on Plum (Int. J. Game Theory 20 (1992) 393) private valuations of the two bidders are independently drawn from distinct but commonly known distributions, one of which first-order stochastically dominates the other. We test the qualitative properties of that model of asymmetric auctions, in particular whether the weak bidder behaves more aggressively than the strong, and then test bidders’ preference for first- vs. second-price auctions.     

On negative time preferences

Survey data show that subjects positively discount both gains and losses but discount gains more heavily than losses. This holds for monetary and non-monetary outcomes. These results do not confirm the findings of two earlier studies about negative time preferences for non-monetary outcomes.     

An experimental investigation of overdissipation in the all pay auction

Pervasive overbidding represents a well-documented feature of all-pay auctions. Aggregate bids exceed Nash predictions in laboratory experiments, and individuals often submit bids that guarantee negative profits. This paper examines three factors that may reduce pervasive overbidding: (a) repetition (experience), (b) reputation (strangers vs. partners), and (c) active participation. Reputation and repetition reduce aggregate overdissipation, but they eliminate it only in conjunction with active participation.     

Negative recency, randomization device choice, and reduction of compound lotteries

We report an experiment in which subjects are not indifferent between real-money lotteries implemented with randomization devices that are equivalent under the Reduction Axiom. Instead, choice behavior is consistent with subjective distortion of conditional probability, and this persists in treatment conditions that control for (i) computational limitations and (ii) possible confounding by ratio bias.     

How do additional alternatives affect individual choice under uncertainty?

Abstract .  We show, in an artefactual field economics decision-making experiment, that the addition of an alternative to a choice set can affect the measurement of farmers' risk preferences in rural Peru. We found that an alternative that would normally be considered irrelevant was chosen in Peru, and that it affected choice between other alternatives. In Montreal, the irrelevant alternative was not chosen, but also affected choices between other alternatives. Comparing choices made in Peru with those made in Montreal, we identify beliefs and cultural characteristics that are likely to lead to these results.