Non-Probabilistic Decision Making with Memory Constraints

In the model of choice, studied in this paper, the decision maker chooses the actions non-probabilistically in each period (Sarin and Vahid, 1999; Sarin, 2000). The action is chosen if it yields the biggest payoff according to the decision maker’s subjective assessment. Decision maker knows nothing about the process that generates the payoffs. If the decision maker remembers only recent payoffs, she converges to the maximin action. If she remembers all past payoffs, the maximal expected payoff action is chosen. These results hold for any possible dynamics of weights and are robust against the mistakes. The estimates of the rate of convergence reveal that in some important cases the convergence to the asymptotic behavior can take extremely long time. The model suggests simple experimental test of the way people memorize past experiences: if any weighted procedure is actually involved, it can possibly generate only two distinct modes of behavior.Adaptive learning; constrained memory; bandit problem; non-probabilistic choice

Awareness in Repeated Games

In this paper we provide a framework to reason about limited awareness of the action space in finitely repeated games. Our framework is rich enough to capture the full strategic aspect of limited awareness in a dynamic setting, taking into account the possibility that agents might want to reveal or conceal actions to their opponent or that they might become "aware of unawareness" upon observing non rationalizable behavior. We show that one can think of these situations as a game with incomplete information, which is fundamentally different, though, from the standard treatment of repeated games with incomplete information. We establish conditions on the "level of mutual awareness" of the action space needed to recover Nash and subgame perfect Nash equilibria from the standard theory with common knowledge. We also show that the set of sustainable payoffs in games with folk theorems does not relate in a monotone way to the "level of mutual awareness".mathematical economics;

Decision Making with Imperfect Knowledge of the State Space

We conduct an experiment to study how imperfect knowledge of the state space affects subsequent choices under uncertainty with perfect knowledge of the state space. Participants in our experiment choose between a sure outcome and a lottery in 32 periods. All treatments are exactly identical in periods 17 to 32 but differ in periods 1 to 16. In the early periods of the “Risk Treatment” there is perfect information about the lottery; in the “Ambiguity Treatment” participants perfectly know the outcome space but not the associated probabilities; in the “Unawareness Treatment” participants have imperfect knowledge about both outcomes and probabilities. All three treatments induce strong behavioural differences in periods 17 to 32. In particular participants who have been exposed to an environment with very imperfect knowledge of the state space subsequently choose lotteries with high (low) variance less (more) often compared to other participants. Estimating individual risk attitudes from choices in periods 17 to 32 we find that the distribution of risk attitude parameters across our treatments can be ranked in terms of first order stochastic dominance. Our results show how exposure to different degrees of uncertainty can have long-lasting effects on individuals’ risk-taking behaviour.microeconomics ;

Rules, Rule-Following, and Cooperation

Rules are thought to persist to the extent that the direct benefits of having them (e.g. reduced transactions costs) exceed the costs of enforcement and of occasional misapplications. We argue that a second crucial role of rules is as screening mechanisms for identifying cooperative types. Thus we underestimate the social value of rules when we consider only their instrumental value in solving a particular problem. We demonstrate experimentally that costly rule-following can be used to screen for conditional cooperators. Subjects participate in a rule-following task in which they may incur costs to follow an arbitrary written rule in an individual choice setting. Without their knowledge, we sort them into groups according to their willingness to follow the rule. These groups then play repeated public goods or trust games. Rule-following groups sustain high public goods contributions over time, but in rule-breaking groups cooperation decays. Rulefollowers also reciprocate more in trust games. However, when individuals are not sorted by type, we observe no differences in the behavior of rule-followers and rule-breakers

Non-Probabilistic Decision Making with Memory Constraints

In the model of choice, studied in this paper, the decision maker chooses the actions non-probabilistically in each period (Sarin and Vahid, 1999; Sarin, 2000). The action is chosen if it yields the biggest payoff according to the decision maker’s subjective assessment. Decision maker knows nothing about the process that generates the payoffs. If the decision maker remembers only recent payoffs, she converges to the maximin action. If she remembers all past payoffs, the maximal expected payoff action is chosen. These results hold for any possible dynamics of weights and are robust against the mistakes. The estimates of the rate of convergence reveal that in some important cases the convergence to the asymptotic behavior can take extremely long time. The model suggests simple experimental test of the way people memorize past experiences: if any weighted procedure is actually involved, it can possibly generate only two distinct modes of behavior

Preferences over Consumption and Status

In many models of interdependent preferences the payoffs have not only personal value but also enter the social part of the utility. This duality creates a problem of distinguishing what influences the choice more: consumption or social concerns. To identify what drives the behavior it is necessary to have a model of preferences that allows for unambiguous separation of personal and social components. I use the preferences for consumption and status as an example to show that the axioms in the paper describe the preferences that have unique expected utility representation with consumption and social utilities entering additively. This makes it possible to experimentally determine the nature of social preferences without ad hoc assumptions and to estimate whether consumption or social value is more important in economic decisions

Preferences over Consumption and Status

In many models of interdependent preferences the payoffs have not only personal value but also enter the social part of the utility. This duality creates a problem of distinguishing what influences the choice more: consumption or social concerns. To identify what drives the behavior it is necessary to have a model of preferences that allows for unambiguous separation of personal and social components. I use the preferences for consumption and status as an example to show that the axioms in the paper describe the preferences that have unique expected utility representation with consumption and social utilities entering additively. This makes it possible to experimentally determine the nature of social preferences without ad hoc assumptions and to estimate whether consumption or social value is more important in economic decisions

Non-Probabilistic Decision Making with Memory Constraints

In the model of choice, studied in this paper, the decision maker chooses the actions non-probabilistically in each period (Sarin and Vahid, 1999; Sarin, 2000). The action is chosen if it yields the biggest payoff according to the decision maker’s subjective assessment. Decision maker knows nothing about the process that generates the payoffs. If the decision maker remembers only recent payoffs, she converges to the maximin action. If she remembers all past payoffs, the maximal expected payoff action is chosen. These results hold for any possible dynamics of weights and are robust against the mistakes. The estimates of the rate of convergence reveal that in some important cases the convergence to the asymptotic behavior can take extremely long time. The model suggests simple experimental test of the way people memorize past experiences: if any weighted procedure is actually involved, it can possibly generate only two distinct modes of behavior

A Portable Method of Eliciting Respect for Social Norms

Recent models of prosociality suggest that cooperation in laboratory games may be better understood as resulting from concern for social norms than from prosocial preferences over outcomes. Underlying this interpretation is the idea that people exhibit heterogeneous respect for shared norms. We introduce a new, abstract task to elicit a proxy for individual norm-following propensity by asking subjects to choose from two actions, where one is costly. We instruct subjects that “the rule is” to take the costly action. Their willingness to incur such a cost reveals respect for norms. We show that choices in this task are similar across five countries. Rule-following is correlated with norm-consistent behavior in dictator games, providing support for our interpretation