Conflicted Minds: Recalibrational Emotions Following Trust-based Interaction.

Consistent with a modular view of the mind, both short-sighted and long-sighted programs may be simultaneously active in the mind and in conflict with one another when individuals face choice dilemmas in trust-based economic interactions. Recalibrational theory helps us identify the adaptive design features shared among subsets of superordinate emotion programs. According to this design logic and the computation of adaptive problem features produced by Trust games, we predict the activation of emotions after Trust games. While this study successfully predicts reports of twenty distinct emotional states, further studies are needed to demonstrate ultimate recalibrational functions of emotions.emotions, recalibrational theory, modularity, Trust game, experiments

Resolving Conflicts by a Random Device

We examine conflict resolution via a random device. We model conflict as a two-agent rent-seeking contest for a fixed prize. Before conflict arises, both agents may agree to allocate the prize by coin flip to avoid the costs of conflict. In equilibrium, risk-neutral agents with relatively symmetric conflict capabilities agree to resolve the conflict by randomization. However, with sufficiently asymmetric capabilities, conflicts are unavoidable because the stronger agent prefers to fight. Laboratory experiments confirm that the availability of the random device partially eliminates conflicts when agents are relatively symmetric; however, the device also reduces conflict between substantially asymmetric agents.Beauty contest, conflict resolution, experiments

Deception and Reception: The Behavior of Information Providers and Users

We investigate the behavior of information providers (underwriters) and users (investors) in a controlled laboratory experiment where underwriters have incentives to deceive and investors have incentives to avoid deception. Participants play simultaneously as underwriters and investors in one-shot information transmission games. The results of our experiment show a significant proportion of both deceptive and non-deceptive underwriters. Despite the presence of deceptive underwriters, investors are receptive to underwriters’ reports, gleaning information content, albeit overly optimistic. Within our sample, deception by underwriters and reception by investors are the most profitable strategies. Moreover, participants who send deceptive reports to investors, but at the same time are receptive to reports of underwriters, earn the highest payoffs. These results call into question the characterization of duped investors being irrational

Do Liars Believe? Beliefs And Other-Regarding Preferences In Sender-Receiver Games

We examine subjects’ behavior in sender–receiver games where there are gains from trade and alignment of interests in one of the two states. We elicit subjects’ beliefs, risk and other-regarding preferences. Our design also allows us to examine the behavior of subjects in both roles, to determine whether the behavior in one role is the best response to the subject\u27s own behavior in the other role. The results of the experiment indicate that, when acting as senders, the majority of subjects adopt deceptive strategies by sending favorable message when the true state of the nature is unfavorable. When acting as receivers, the majority of subjects invest conditional upon receiving a favorable message. The investing behavior of receivers cannot be explained by risk preferences or as a best response to subject\u27s own behavior in the sender\u27s role. However, it can be rationalized by accounting for elicited beliefs and other-regarding preferences. Finally, the honest behavior of some senders can be explained by other-regarding preferences. Thus, we that find liars do believe, and that individuals who care about the payoffs of others tend to be honest

Do Investors Trust or Simply Gamble?

We design an experiment to study individual behavior in a strategic information setting where the sender has economic incentives to deceive and the receiver has economic incentives to avoid deception. To ascertain whether subjects in the role of receiver glean information content from the sender’s message, we elicit choices from risky gambles constructed to be mathematically equivalent to the information setting if the sender’s message lacks information content. In the experiment subjects act simultaneously as a sender and receiver in a one-shot interaction. The findings of our experiment indicate that (i) subjects tend to act deceptively as senders but trusting as receivers, and (ii) as receivers, subjects glean information content from the senders’ messages. Thus, we find investors (receivers) trust and investment cannot be rationalized solely by subjects’ attitudes towards risk

Do Liars Believe? Beliefs and Other-Regarding Preferences in Sender-Receiver Games

We examine subjects‟ behavior in sender-receiver games where there are gains from trade and alignment of interests in one of the two states. We elicit subjects‟ beliefs, risk and other-regarding preferences. Our design also allows us to examine the behavior of subjects in both roles, to determine whether the behavior in one role is the best response to the subject‟s own behavior in the other role. The results of the experiment indicate that 60 percent of senders adopt deceptive strategies by sending favorable message when the true state of the nature is unfavorable. Nevertheless, 67 percent of receivers invest conditional upon a favorable message. The investing behavior of receivers cannot be explained by risk preferences or as a best response to subject‟s own behavior in the sender‟s role. However, it can be rationalized by accounting for elicited beliefs and other-regarding preferences. Finally, the honest behavior of some senders can be explained by other-regarding preferences. Thus we find liars do believe, and individuals who care about the payoffs of others tend to be honest

Trust, Reciprocity and Rules

In the absence of enforceable contracts, many economic and personal interactions rely on trust and reciprocity. Research shows that although this reliance often works well, sometimes it breaks down. Simple rules mandating minimum standards on reciprocation prevent the most egregious trust violations, but may also undermine behavior that would have otherwise produced higher overall economic welfare. We test the efficacy of exogenously imposed minimum return rules using experimental trust games. We find that rules fail to increase trust and trustworthiness. Thus low minimum standards significantly decrease economic welfare. Although sufficiently restrictive rules restore welfare, trust and trustworthy behavior never returns.trust games, experiments, reputation, information, reciprocity

Transparency, Efficiency and the Distribution of Economic Welfare in Pass-Through Investment Trust Games

We design an experiment to examine welfare and behavior in a multi-level trust game representing a pass through investment in an intermediated market. In a repeated game, an Investor invests via an Intermediary who lends to a Borrower. A pre-experiment one-shot version of the game serves as a baseline and to type each subject. We alter the transparency of exchanges between non-adjacent parties. We find transparency of the exchanges between the investor and intermediary does not significantly affect welfare. However, transparency regarding exchanges between the intermediary and borrower promotes trust on the part of the investor, increasing welfare. Further, this has asymmetric effects: borrowers and intermediaries achieve greater welfare benefits than investors. We discuss implications for what specific aspects of financial market transparency may facilitate more efficiency.financial intermediation, financial market transparency, pass through securities, multi-level trust games, experiments

Conflicted Emotions Following Trust-Based Interaction

We observed reports of conflicted (concurrent positive and negative) emotions activated after interactions in the Trust game. Our analyses reveal that activation of 20 emotional states following trust-based interaction is better explained by predictions derived from a multi-dimensional Recalibrational perspective than by predictions derived from two-dimensional Valence and Arousal perspectives. The Recalibrational perspective proposes that emotions are activated according to their functional features – for example, emotions help people achieve short or long-sighted goals by up or down-regulating behavioral propensities, whereas Valence and Arousal perspectives consider simpler hedonic dimensions lacking functional specificity. The Recalibrational perspective is also distinguished from the Valence and Arousal perspectives in that it predicts the possibility of conflicted emotions. We discuss the theoretical implications of having conflicted goals and the economic implications of having conflicted emotions

Parity Promotes Peace: Resolving Conflicts Through A Random Device

Due to the high costs of conflict both in theory and practice, we examine and experimentally test the conditions under which conflict between asymmetric agents can be resolved. We model conflict as a two-agent rent-seeking contest for an indivisible prize. Before conflict arises, both agents may agree to allocate the prize by fair coin flip to avoid the costs of conflict. The model predicts that “parity promotes peace”: in the pure-strategy equilibrium, agents with relatively symmetric conflict capabilities agree to resolve the conflict by using a random device; however, with sufficiently asymmetric capabilities, conflicts are unavoidable because the stronger agent prefers to fight. The results of the experiment confirm that the availability of the random device partially eliminates conflicts when agents are relatively symmetric; however, the device also reduces conflict between substantially asymmetric agents