Instinctive Response in the Ultimatum Game

In a series of recent papers, Ariel Rubinstein claims that the study of response time sheds light on the process of reasoning involved in classical economic decision problems. In particular, he considers that a distinction can be drawn between instinc- tive and cognitive reasoning. This paper complements and expands upon Rubinstein's study on time responses. We show that strategic risk is the key element in explaining differences in median response time in ultimatum behavior.Economic experiments, Ultimatum game, Yes-or-No game, median response time.

Promoting Intellectual Discovery: Patents Versus Markets

Because they provide exclusive property rights, patents are generally considered to be an effective way to promote intellectual discovery. Here, we propose a different compensation scheme, in which everyone holds shares in the components of potential discoveries and can trade those shares in an anonymous market. In it, incentives to invent are indirect, through changes in share prices. In a series of experiments, we used the knapsack problem (in which participants have to determine the most valuable subset of objects that can fit in a knapsack of fixed volume) as a typical representation of intellectual discovery problems. We found that our "markets system" performed better than the patent system

Looking into crystal balls: a laboratory experiment on reputational cheap talk

We experimentally study information transmission by experts motivated by their reputation for being well-informed. In our game of reputational cheap talk, a reporter privately observes information about a state of the world and sends a message to an evaluator; the evaluator uses the message and the realized state of the world to assess the reporter’s informativeness. We manipulate the key driver of misreporting incentives: the uncertainty about the phenomenon to forecast. We highlight three findings. First, misreporting information is pervasive even when truthful information transmission can be an equilibrium strategy. Second, consistent with the theory, reporters are more likely to transmit information truthfully when there is more uncertainty on the state. Third, evaluators have difficulty learning reporters’ strategies and, contrary to the theory, assessments react more strongly to message accuracy when reporters are more likely to misreport. In a simpler environment with computerized evaluators, reporters learn to best reply to evaluators’ behavior and, when the state is highly uncertain and evaluators are credulous, to transmit information truthfully

Strategic risk and response time across games

Experimental data for two types of bargaining games are used to study the role of strategic risk in the decision making process that takes place when subjects play a game only once. The bargaining games are the Ultimatum Game (UG) and the Yes-or-No Game (YNG). Strategic risk in a game stems from the effect on one player’s payoff of the behavior of other players. In the UG this risk is high, while it is nearly absent in the YNG. In studying the decision making process of subjects we use the time elapsed before a choice is made (response time) as a proxy for amount of thought or introspection. We find that response times are on average larger in the UG than in the YNG, indicating a positive correlation between strategic risk and introspection. In both games the behavior of subjects with large response times is more dispersed than that of subjects with small response times. In the UG larger response time is associated with less generous and thus riskier behavior, while it is associated to more generous behavior in the YNG

Competition in Portfolio Management: Theory and Experiment

We explore theoretically and experimentally the general equilibrium price and allocation implications of delegated portfolio management when the investor--manager relationship is nonexclusive. Our theory predicts that competition forces managers to promise portfolios that mimic Arrow--Debreu AD securities, which investors then combine to fit their preferences. A weak version of the capital asset pricing model CAPM obtains, where state prices relative to state probabilities implicit in prices of traded securities will be inversely ranked to aggregate wealth across states. Our experiment broadly corroborates the price and choice predictions of the theory. However, price quality deteriorates when only a few managers attract most of the available wealth. Wealth concentration increases because funds flow toward managers who offer portfolios closer to replicating AD securities as in the theory, but also because funds flow to managers who had better performance in the immediate past an observation unrelated to the theory. This paper was accepted by Jerome Detemple, finance

Non-Standard Errors

In statistics, samples are drawn from a population in a data-generating process (DGP). Standard errors measure the uncertainty in estimates of population parameters. In science, evidence is generated to test hypotheses in an evidence-generating process (EGP). We claim that EGP variation across researchers adds uncertainty: Non-standard errors (NSEs). We study NSEs by letting 164 teams test the same hypotheses on the same data. NSEs turn out to be sizable, but smaller for better reproducible or higher rated research. Adding peer-review stages reduces NSEs. We further find that this type of uncertainty is underestimated by participants

Prices, Holdings, and Learning in Financial Markets: Experiments and Methodology

This thesis is a compilation of three essays that bridge the theoretical and empirical study of financial markets. The subjects of study in the three main chapters are (i) equilibrium models of asset prices and asset holdings and trade; (ii) limited computational capacity and its interaction with asset prices and trades. In chapter 1 (joint with Peter Bossaerts) we show that statistical improvements can be made on a traditional test of portfolio "efficiency." Testing portfolio efficiency is used in the practice of investment decisions as well as to test theoretical models of asset prices (CAPM and multifactor models). We propose a parametric family of tests of the efficiency of a portfolio in a market with a risk-free asset. All tests in the family compare the mean-variance ratio of the tested portfolio (benchmark) with that of a different portfolio (reference). We show that the power of a test in our proposed family depends on the correlation between the benchmark and the reference portfolio. This provides a way to improve the power of efficiency tests for a given sample, by choosing the appropriate test in this family. Chapter 2 (joint with Peter Bossaerts and William Zame), is a test of the theory of dynamically complete markets. In this work we compare prices and portfolio choices in complete and incomplete experimental financial markets. The incomplete-markets treatment differs from the complete-markets one in that we close one market, and announce, halfway through trading, which of three states will not occur. We find prices and allocations to be analogous across the two treatments, as predicted by theory. In particular, subjects' additional trading in the incomplete-markets treatment is such that the final allocations become indistinguishable from the complete-markets treatment. The results show that participants form rational expectations about retrade prices, which is a very strong finding. Chapter 3 (joint work with Peter Bossaerts and Jernej Copic) moves away from existing theoretical paradigms. It explores the implications of analyzing intellectual discovery as the solution of a nonincremental problem, outside the reach of traditional models of learning with updating. The experiment sets up a situation that is non-incremental and where Bayesian updating is not a sensible model. In this framework we find that communication is possible, and that a primitive code is good enough to achieve intellectual discovery, not discourage it.</p