Are Under- and Over-reaction the Same Matter? A Price Inertia based Account

Theories on under- and over-reaction in asset prices fall into three types: (1) they are respectively driven by different psychological factors; (2) they are driven by different types of investors; and (3) they reflect un-modeled risk. We design an asset market where information arrives sequentially over time and is revealed asymmetrically to investors. None of the three hypotheses is supported by our data: (1) Investors do not respond differently to public information and private information, and they do not behave in ways that are claimed by multiple psychological models; (2) no groups of investors are identified to drive under- or over-reaction in particular; (3) price deviation from expected payoff cannot be justified by risk metrics. We find that prices react insufficiently to news surprises, possibly because of cautious conservatism on the part of investors and under-reacting drifts outnumber overreacting reversals substantially. Contrary to common beliefs, we find that over-reaction is caused by slow adjustment of prices to surprises, similar to the cause of under-reaction. It is the degree of price inertia that drives the relative frequencies of under- and over-reaction. We propose a simple price inertia theory of under- and over-reaction: when information arrives sequentially over time, the market is characterized by a slow convergence toward intrinsic value; when news surprises are of the same signs, prices falls behind newly updated intrinsic values, manifesting under-reacting drifts; when news surprises change signs, prices again do not adjust quick enough to catch up with the new intrinsic values, manifesting a temporal pattern of overreacting reversals.Experimental finance, under-reaction, overreaction, behavior, price inertia, risk aversion

The strategic motive to sell forward: experimental evidence

We test the strategic motive to sell forward in experimental Cournot duopoly and quadropoly environments with either a finite (exogenous close) or an infinite (endogenous close) number of forward markets. In the exogenous close case experienced subjects do not avail themselves of the forward markets and production mostly occurs in the spot market phase. In a forward market duopoly experienced subjects achieve nearly the monopoly output level. For the quadropoly output levels are more competitive and are near the Cournot Nash equilibrium. In both cases output produced is much less than the Allaz-Vila (1993) prediction. The results with inexperienced subjects, however, are in line with theory and as reported in Le-Coq and Orzen (2006). We implement the case of infinitely many forward periods using the endogenous close rule. In this case the results both for a forward market duopoly and quadropoly are much more competitive both with inexperienced and experienced subjects. Unlike the exogenous stopping rule, under the endogenous rule subjects sell forward in the forward markets and find it hard to coordinate their actions

Real Effort, Real Leisure and Real-time Supervision: Incentives and Peer Pressure in Virtual Organizations.

We propose a novel approach to the analysis of organizations by developing a computerized platform that reproduces relevant features of existing organizations such as real-effort tasks and real-leisure alternative activities (Internet). In this environment, we find strong incentives effects as organizations using individual incentives significantly outperform those relying on team incentives. Combining real-time peer monitoring with team incentives, we report striking evidence of positive peer effects as production increases by 50% and Internet usage decreases by 54% compared with organizations using team incentives alone. Peer monitoring allows virtual organizations using team incentives to perform as well as those using individual incentives. However, the positive effect of peer monitoring does not apply to low performers.team incentives, free-riding, monitoring, peer pressure, virtual organization

The effect of experience in Cournot play

Strategic play requires that players in oligopolies be more sophisticated than in perfectly competitive markets. It thus seems reasonable to assume that player experience becomes important as the environment gets more complicated. We find that subject experience indeed plays an important role. While inexperienced symmetric duopolies play around the Nash-Cournot quantity, experienced duopolies reduce output and get closer to the monopolistic outcome. Both inexperienced and experienced symmetric quadropolies,however, produce output above the Nash-Coumot equilibrium but, even in this case, output is lower for experienced quadropolies. Experience, however, does not make markets less competitive with the introduction of cost asymmetry. Under cost asymmetry, and relative to the equilibrium prediction, high cost firms produce more output than low cost firms. Analysis of individual data tells us that experienced duopolies and quadropolies adjust output in the same direction as their rivals. Due to the strategic substitutability of quantity choice, we interpret this as an attempt at tacitly colluding. This is true for both duopolies and quadropolies.

Multiple openings of forward markets: experimental evidence

We test the strategic motive to sell forward in experimental Cournot duopoly and quadropoly environments with multiple forward markets. Using random matching, we test two versions of forward markets with finite (Allaz and Vila, 1993) and indefinite number of periods. We find that the results for the Allaz and Vila (1993) model are remarkably close to the predicted theoretical results for both duopolies and quadropolies. We then test a version of the model to allow for indefinitely many periods. There are multiple equilibria in this theoretical model, including both the competitive and collusive outcomes. We find that the initial "collusive hypothesis" is not ratified, and that outcomes are nearly competitive. Sales take place mostly in the first few openings of futures markets. Again, these results hold for both duopolies and quadropolies.

The strategic motive to sell forward: experimental evidence

We test the strategic motive to sell forward in experimental Cournot duopoly and quadropoly environments with either a finite (exogenous close) or an infinite (endogenous close) number of forward markets. In the exogenous close case experienced subjects do not avail themselves of the forward markets and production mostly occurs in the spot market phase. In a forward market duopoly experienced subjects achieve nearly the monopoly output level. For the quadropoly output levels are more competitive and are near the Cournot Nash equilibrium. In both cases output produced is much less than the Allaz-Vila (1993) prediction. The results with inexperienced subjects, however, are in line with theory and as reported in Le-Coq and Orzen (2006). We implement the case of infinitely many forward periods using the endogenous close rule. In this case the results both for a forward market duopoly and quadropoly are much more competitive both with inexperienced and experienced subjects. Unlike the exogenous stopping rule, under the endogenous rule subjects sell forward in the forward markets and find it hard to coordinate their actions.

The Effect of Bidding Information in Ascending Auctions.

We study the effect of the drop out and reenter information in an environment where bidders' values involve both private and common value components. We find that (1) providing bidding information does not have a significant effect on expected revenue and expected efficiency. (2) The effect of information on winner's expected profit depends on the range of uncertainty of the common value component and the level of Nash profit prediction, which the auctioneer has no a priori knowledge. In our environment, where bidders have a private component to their value and the auction takes place in ascending clock format, (3) bidders do not suffer from the winner's curse when information is not provided. (4) Information substantially increases the variability of revenue and winner?s profit when the range of uncertainty of the common value component is large. (5) Bidders? response to information depends on the range of uncertainty.

Combinatorial Clock Auctions: Price Direction and Performance

This paper addresses three concerns with ascending price Combinatorial Clock Auc- tions (APCA); price guidance toward e ciency relevant packages, computational bur- den, and susceptibility to collusive bidding. We propose a descending price Combi- natorial Clock Auction (DPCA) with a newly devised pricing strategy to alleviate all of these concerns. Mimicking bidding behavior of human subjects found in previous laboratory experiments, agent-based simulations of a DPCA show improvements in ef- ciency resulting from better price guidance and a reduction in computational burden when compared to an APCA

Peer Pressure and Moral Hazard in Teams: Experimental Evidence

Team incentives have been found to be particularly effective both in the lab and in the field despite the moral hazard in teams problem identified by Holmström (1982). In a newly developed virtual workplace, we show that, in line with Holmström, moral hazard in teams is indeed pervasive. Subsequently, we find strong evidence for the conjecture of Kandel and Lazear (1992) that peer pressure may resolve the moral hazard in teams problem. Organizations equipped with a very weak form of peer monitoring (anonymous and without physical proximity, verbal threats or face-to-face interactions) perform as well as those using individual incentives

Firing Threats and Tenure: Incentive Effects and Impression Management

We study the effect of firing threats and tenure in a virtual workplace that reproduces features of existing organizations. We show that organizations in which bosses can fire up to one third of their workforce produce twice more than organizations for which firing is not possible. Firing threats sharply decrease on-the-job leisure activities. Nevertheless, organizations endowed with firing threats significantly underperformed those using individual incentives. Our analysis also indicates that, in the presence of firing threats, employees engage in impression management activities in order to be seen as hard-working individuals. These results are consistent with the predictions of our theoretical model in which workers aim at signaling a high level of intrinsic motivation to increase their chance of obtaining tenure. Finally, we show that production levels dropped substantially under tenure while on-the-job leisure surged