Signaling probabilities in ambiguity: who reacts to vague news?

Ambiguity affects decisions of people who exhibit a distaste of and require a premium for dealing with it. Do ambiguity-neutral subjects completely disregard ambiguity and respond to any vague news? We couple decision-making in ambiguity with a preliminary information processing stage, where news is used to test prior beliefs and, possibly but not necessarily, update them. All decision-makers, including ambiguity-neutral, recognize and account for ambiguity at this stage; higher confidence makes ambiguity-neutral subjects less susceptible to vague news. In a two-color Ellsberg experiment with imprecise signals about the unknown probability of success they are less likely to respond to signals; the difference between them and non-neutral to ambiguity subjects vanishes for high precision signals. Less than 60% subjects choose the ambiguous urn, even for high communicated probabilities of success, suggesting many participants, especially ambiguity-neutral, discard vague news at the information processing stage. JEL: C90, D01, D81, as well as seminar participants at ETH-Zürich, University of Essex, University of Glasgow and University of Hamburg, and participants of iCare conference at HSE in Perm and JE on Ambiguity and Strategic Interactions at the University of Grenoble for helpful comments, suggestions and encouragement. All remaining errors are ours

The Evolution of 'Theory of Mind': Theory and Experiments

Abstract. This paper provides an evolutionary foundation for our capacity to attribute preferences to others. This ability is intrinsic to game theory, and is a key component of “Theory of Mind”, perhaps the capstone of social cognition. We argue here that this component of theory of mind allows organisms to efficiently modify their behavior in strategic environments with a persistent element of novelty. Such environments are represented here by multistage games of perfect information with randomly chosen outcomes. “Theory of Mind ” then yields a sharp, unambiguous advantage over less sophisticated, behavioral approaches to strategic interaction. In related experiments, we show the subscale for social skills in standard tests for autism is a highly significant determinant of the speed of learning in such games. We thank participants at a large number of departmental seminars for useful comments

The Execution of Monetary Policy: A Tale of Two Central Banks

The Eurosystem and the U.S. Federal Reserve System follow quite different approaches to the execution of monetary policy. The former institution adopts a hands-off approach that largely delegates to depository institutions the task of stabilizing their own liquidity at high frequency. The latter institution follows a much more hands-on approach involving daily intervention to fine-tune the liquidity of the banking system. We review the implications of these contrasting approaches, focusing on their impact on the high-frequency behavior of very short-term interest rates. We also examine interest rate behavior following the Y2K date change and the 9/11/2001 crisis - events that required the two central banks to deviate significantly from their customary style of liquidity management. We find that, despite differences in operational framework, certain elements of the institutions' styles of day-to-day intervention have caused very short-term interest rates to behave similarly in the euro area and the United States. Significantly, during periods of anticipated or actual crisis, the two institutions have acted very much alike in managing the liquidity of the interbank market in response to shocks