Comprehension in risk elicitation experiments

Economic experiments are increasingly conducted with field populations for whom comprehension of instructions may be more difficult to achieve. We investigate how framing experimental instructions in a familiar context and incentivizing the experimental task may affect comprehension. Based on an experiment with 146 German farmers, we compare four different versions of a Holt-and-Laury multiple price list. We find that incentives have a small positive effect on comprehension, as measured by the probability of making inconsistent choices and subjects’ self-assessment. In the absence of incentives, framing negatively affects comprehension. Comprehension is enhanced for farmers who score high on a numeracy test. We conclude that contextual framing might confuse subjects, whereas incentives can help to facilitate comprehension of experimental instructions.     

Stability of risk preference parameter estimates within the Becker-DeGroot-Marschak procedure

This paper reports new data from both selling and buying versions of the Becker-DeGroot-Marschak (BDM) procedure. First, when using the selling version of BDM, the cross-sectional mean of CRRA risk preference parameter estimates shifts from a value consistent with “as if” risk-seeking behavior in the early baseline to a value closer to “as if” risk neutrality in the late baseline. Second, when using the buying version of BDM, the cross-sectional mean of CRRA risk preference parameter estimates does not appear to change over time in a statistically significant manner. The cross-sectional mean from the late baseline of the buying version of BDM is closer to “as if” risk neutrality and to the late baseline estimates from the selling version of BDM than it is to either early baseline estimates from the selling version of BDM or typical estimates from the first price auction. Use of dominated offers is correlated with deviations from “as if” risk neutrality; this suggests the possibility that the early deviations from “as if” risk neutrality reflect errors. Electronic Supplementary Material Supplementary material is available in the online version of this article at . JEL Classification D80     

Experimental internet auctions with random information retrieval

We run an experiment where 97 subjects could retrieve records of completed past auctions before placing their bids in current one-bid, two-bid, and auction-selection games. Each subject was asked to participate in 3 current auctions; but could retrieve up to 60 records of completed (past) auctions. The results reveal a positive relation between the payoffs earned by the subjects and their history-inspection effort. Subjects act as if responding to the average bidding-ratios of the winners in the samples that they have retrieved. They apply intuitive signal-dependent stopping rules like “sample until observing a winner-value close to my won” or “find a close winner-value and try one more history” when sampling the databases. History-inspection directs bidders with relatively high private-valuations to moderate bidding which increases their realized payoffs. (JEL C9 D4 D8) Electronic Supplementary Material Supplementary material is available in the online version of this article at . JEL Classification C93, D44, D83     

Context matters

Eliciting the level of risk aversion of experimental subjects is of crucial concern to experimenters. In the literature there are a variety of methods used for such elicitation; the concern of the experiment reported in this paper is to compare them. The methods we investigate are the following: Holt–Laury price lists; pairwise choices, the Becker–DeGroot–Marschak method; allocation questions. Clearly their relative efficiency in measuring risk aversion depends upon the numbers of questions asked; but the method itself may well influence the estimated risk-aversion. While it is impossible to determine a ‘best’ method (as the truth is unknown) we can look at the differences between the different methods. We carried out an experiment in four parts, corresponding to the four different methods, with 96 subjects. In analysing the data our methodology involves fitting preference functionals; we use four, Expected Utility and Rank-Dependent Expected Utility, each combined with either a CRRA or a CARA utility function. Our results show that the inferred level of risk aversion is more sensitive to the elicitation method than to the assumed-true preference functional. Experimenters should worry most about context.     

Multiple switching behaviour in different display formats of multiple price lists

A common approach to elicit risk attitude is the multiple price list with a series of binary choices. However, a frequently observed problem when using multiple price lists is that participants switch more than once from the safer to the riskier option, thus exhibiting multiple switching behaviour. The present study analyses whether the visualization of different multiple price lists reduce multiple switching behaviour. Therefore, we conduct two types of multiple price lists in two different display formats. Participants are randomly assigned into a textual or a visual group and carry out both multiple price lists in the corresponding display format. Our results reveal that different types of multiple price lists lead to differences in the extent of multiple switching behaviour. Moreover, we show that the visualization of a multiple price list can be an instrument to greatly reduce multiple switching behaviour.     

“Si él lo necesita”: Gypsy fairness in Vallecas

“Si él lo necesita” (if he really needs it) was the most common argument given by the subjects who accepted the zero offer in the ultimatum game (strategy method) during experiments conducted among illiterate (adult) gypsies in Vallecas, Madrid. Interestingly the acceptance of the zero offer was not a rare case but, in contrast, was the modal value. This is even more remarkable if we consider that the 97% of the subjects proposed the equal split. Electronic Supplementary Material Supplementary material is available in the online version of this article at http://dx.doi.org/10.1007/s10683-006-9126-0. JEL Classification D63 · D64 · C93 · J15     

Searching for the sunk cost fallacy

We seek to isolate in the laboratory factors that encourage and discourage the sunk cost fallacy. Subjects play a computer game in which they decide whether to keep digging for treasure on an island or to sink a cost (which will turn out to be either high or low) to move to another island. The research hypothesis is that subjects will stay longer on islands that were more costly to find. Eleven treatment variables are considered, e.g. alternative visual displays, whether the treasure value of an island is shown on arrival or discovered by trial and error, and alternative parameters for sunk costs. The data reveal a surprisingly small sunk cost effect that is generally insensitive to the proposed psychological drivers. Electronic Supplementary Material Supplementary material is available in the online version of this article at . Jel Classification C91, D11     

SUBJECTIVE PROBABILITIES IN GAMES: AN APPLICATION TO THE OVERBIDDING PUZZLE*

This article illustrates how the joint elicitation of subjective probabilities and preferences may help us understand behavior in games. We conduct an experiment to test whether biased probabilistic beliefs may explain overbidding in first‐price auctions. The experimental outcomes indicate that subjects underestimate their probability of winning the auction, and indeed overbid. When provided with feedback on the precision of their predictions, subjects learn to make better predictions, and to curb significantly overbidding. The structural estimation of different behavioral models suggests that biased probabilistic beliefs are a driving force behind overbidding, and that risk aversion plays a lesser role than previously believed.     

Fixed price plus rationing: an experiment

This paper theoretically and experimentally explores a fixed price mechanism in which, if aggregate demand exceeds supply, bidders are proportionally rationed. If demand is uncertain, in equilibrium bidders overstate their true demand in order to alleviate the effects of being rationed. This effect is the more intense the lower the price, and bids reach their upper limit for sufficiently low prices. In the experiment we observe a significant proportion of equilibrium play. However, subjects tend to overbid the equilibrium strategy when prices are high and underbid when prices are low. We explain the experimental evidence by a simple model in which the probability of a deviation is decreasing in the expected loss associated with it.

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The rise of cooperation in correlated matching prisoners dilemma: An experiment

Recently, there has been a Renaissance for multi-level selection models to explain the persistence of unselfish behavior in social dilemmas, in which assortative/correlated matching plays an important role. In the current study of a multi-round prisoners’ dilemma experiment, we introduce two correlated matching procedures that match subjects with similar action histories together. We discover significant treatment effects, compared to the control procedure of random matching. Particularly with the weighted history matching procedure we find bifurcations regarding group outcomes. Some groups converge to the all-defection equilibrium even more pronouncedly than the control groups do, while other groups generate much higher rate of cooperation, which is also associated with higher relative reward for a typical cooperative action. All in all, the data show that cooperation does have a much better chance to persist in a correlated/assortative-matching environment, as predicted in the literature. Electronic Supplementary Material Supplementary material is available in the online version of this article at . JEL Classification B52, C91, D74     

Observability and overcoming coordination failure in organizations: An experimental study

Motivated by problems of coordination failure in organizations, we examine how overcoming coordination failure and maintaining coordination depend on the ability of individuals to observe others’ choices. Subjects’ payoffs depend on coordinating at high effort levels in a weak-link game. Treatments vary along two dimensions. First, subjects either start with low financial incentives for coordination, which typically leads to coordination failure, and then are switched to higher incentives or start with high incentives, which usually yield effective coordination, and are switched to low incentives. Second, as the key treatment variable, subjects either observe the effort levels chosen by all individuals in their experimental group (full feedback) or observe only the minimum effort (limited feedback). We find three primary results: (1) When starting from coordination failure the use of full feedback improves subjects’ ability to overcome coordination failure, (2) When starting with good coordination the use of full feedback has no effect on subjects’ ability to avoid slipping into coordination failure, and (3) History-dependence, defined as dependence of current effort levels on past incentives, is strengthened by the use of full feedback. Electronic Supplementary Material Supplementary material is available in the online version of this article at . JEL Classification C92, D23, J31, L23, M52     

Bidding ‘as if’ risk neutral in experimental first price auctions without information feedback

Experimental research on first price sealed bid auctions has usually involved repeated settings with information feedback on winning bids and payoffs after each auction round. Relative to the risk neutral Nash equilibrium, significantly higher bidding has been reported. The present paper reports the results of experimental first price auctions with n=7 where feedback on payoffs and winning bids is withheld. Under these conditions, average bidding is below the risk neutral Nash equilibrium prediction but converges to it with repetition.

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Convex Time Budgets and Individual Discount Rates in the Long Run

The purpose of this study is to use experimental data to estimate individual discount rates and test for hyperbolic discounting over a long time horizon. To do this, we employ the convex time budget experimental approach with cash payments over a 20 year time horizon. To date, there are few experimental studies that explore discount rates beyond a 1 year time horizon. Previous experimental studies that focus on short time horizons find high discount rates, which may not be applicable to decisions that affect outcomes in the distant future. Our findings are quite similar to the average rate of 4.9% found by Grijalva et al. (Environ Resour Econ 59:39–63, 2014), who similarly use a 20 year time horizon, but use the multiple price list elicitation method along with payment via government savings bonds. We find annual discounts rates in the range of 1.9–5.5%, depending on the specific model used. We also find evidence for declining discount rates, and that this hyperbolic pattern of behavior is related to the confidence subjects have in receiving distant-future payments.     

Experimental evidence on coverage choices and contract prices in the market for corporate insurance

In this paper, we present experimental evidence on the effect adverse selection has on coverage choices and pricing in corporate insurance markets. Two sets of experimental data, each generated by experiments utilizing a specific parameterization of a corporate insurance decision, are presented to gauge these effects. In the first, subject behavior conforms to a unique equilibrium in which high risk firms choose higher coverage and contracts are priced accordingly. Insurers act competitively and convergence to equilibrium behavior is marked. In the second set, there is little evidence that subject behavior is consistent with either of the two equilibrium outcomes supported by the experimental setting—pooling by fully insuring losses and pooling by self insuring. JEL Classification C90, G14, G22 Electronic Supplementary Material Supplementary material is available in the online version of this article at http://dx.doi.org/10.1007/s10683-006-9152-y.     

Uniform price auctions and fixed price offerings in IPOs: an experimental comparison

We compare uniform price auctions with fixed price offerings in Initial Public Offerings (IPO) using laboratory experiments. The experimental environment is based on the Biais and Faugeron-Grouzet (J. Financ. Intermed. 11:9–36, 2002) model. Standard predictions based on tacit collusion equilibria (TCE) suggest lower revenues in uniform price auctions, although alternative equilibria allow for higher revenues. In our experiment, there is no evidence that TCE are played. The experiment suggests that the uniform price auctions are superior to fixed price offerings in terms of raising revenues.

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Testing subgame perfection apart from fairness in ultimatum games

We present an experiment designed to separate the two commonplace explanations for behavior in ultimatum games—subjects’ concern for fairness versus the failure of subgame perfection as an equilibrium refinement. We employ a tournament structure of the bargaining interaction to eliminate the potential for fairness to influence behavior. Comparing the results of the tournament game with two control treatments affords us a clean test of subgame perfection as well as a measure fairness-induced play. We find after 10 iterations of play that about half of all non-subgame-perfect demands are due to fairness, and the rest to imperfect learning. However, as suggested by models of learning, we also confirm that the ultimatum game presents an especially difficult environment for learning subgame perfection. Electronic Supplementary Material Supplementary material is available in the online version of this article at . JEL Classification C91, D64, J52     

Policy making and rent-dissipation: An experimental test

We present a transfer-seeking model of political economy that links the theory of Becker (1983) with Tullock-type models of politically contestable rents. In our model the size of the transfer is determined endogenously, and over-dissipation of rents is predicted even under conditions of risk-neutrality and perfect rationality. We implement an empirical test of this model by collecting behavioral data in a laboratory experiment. We confirm the existence of behavior that leads to over-dissipation of rents in games with both symmetric and asymmetric political power. To the extent that the transfer-seeking costs are social costs, our findings imply that the total costs of running government might be greatly underestimated if the value of the rent is used as a proxy for the rent-seeking cost. We also confirm the hypotheses that lowering the political power of one player can lead to smaller rent-seeking expenditures and to larger transfers Electronic Supplementary Material Supplementary material is available in the online version of this article at . JEL Classification C91, D72     

Information acquisition in the ultimatum game: An experimental study

We experimentally investigate if free information disadvantages a player relative to when information is unavailable. We study an Ultimatum game where the Proposer, before making an offer, can obtain free information about the Responder's minimum acceptable offer. Theoretically, the Proposer should obtain the information and play a best reply to the Responder's minimum acceptable offer. Thus the Responder should get the largest share of the surplus. We find that an increasing number of Proposers become informed over time. Moreover, the proportion of Proposers who use the information to maximize money earnings increases over time. The majority of information-acquiring Proposers, however, refuse to offer more than one-half and play a best reply only to Responders who accept offers of one-half or less. This, together with a substantial proportion of Proposers who choose to remain uninformed, means that the availability of free information backfires for Proposers only by a little. Electronic Supplementary Material Supplementary material is available in the online version of this article at . JEL Classification C70, D63, D80     

Framing the first-price auction

We revisit the result that, in laboratory independent private values auction, the first-price sealed bid and descending clock (or Dutch) implementations are not isomorphic. We investigate the hypothesis that this arises from framing and presentation effects. Our design focuses on a careful construction of subject interfaces that present the two environments as similarly as possible. Our sessions also consist of more auction periods to test whether any initial framing effects subsequently decrease over time. We find the difference between the implementations persists. To further investigate the difference, we report on an intermediate implementation which operates like the Dutch auction, but in which the clock continues to tick to the lowest price without informing bidders when others have bid on the object. JEL Classification D44, C90 Deceased     

A network experiment in continuous time: The influence of link costs

In recent work on non-cooperative network formation star-shaped networks play an important role. In a particular theoretical model of Bala and Goyal (2000) center-sponsored stars are the only strict Nash networks. In testing this theoretical model, Falk and Kosfeld (2003) do not find experimental evidence that players select the center-sponsored star. Based on a slight modification of Bala and Goyal’s model, we design a network formation experiment in which, depending on link costs, periphery-sponsored stars and the empty network are the only strict Nash networks. We observe that almost all groups not only reach a strict Nash network once but also switch the center player in periphery-sponsored stars several times. The main innovation in our experiment is to use a continuous time framework which we believe to be a more realistic setting to study behavior in network formation situations and which makes coordination on stars much easier than simultaneous strategy adaptation in discrete time. Electronic Supplementary Material Supplementary material is available in the online version of this article at http://dx.doi.org/10.1007/s10683-006-9125-1. JEL Classification C72 · C92 · D81