Survival with ambiguity

We analyze a market populated by expected utility maximizers and smooth ambiguity-averse consumers. We study conditions under which ambiguity-averse consumers survive and a¤ect prices in the limit. If ambiguity vanishes with time or if the economy exhibits no aggregate risk, ambiguity-averse consumers survive, but have no long-run impact on prices. In both scenarios, ambiguity-averse consumers are fully insured against ambiguity in equilibrium and, thus, behave as expected utility maximizers with correct beliefs. If ambiguity-averse consumers are not fully insured against ambiguity, they behave as expected utility maximiz- ers with e¤ectively wrong beliefs and an e¤ective discount factor which might be higher or lower than their actual discount factor. Using this in- sight, we demonstrate that consumers with constant absolute ambiguity aversion vanish in expectations, whenever the economy faces aggregate risk. In contrast, consumers with constant relative (and thus, decreas- ing absolute) ambiguity aversion survive in expectation and with positive probability and have a non-trivial impact on prices in the limit

Extrapolation in Games of Coordination and Dominance Solvable Games

We study extrapolation between games in a laboratory experiment. Participants in our experiment first play either the dominance solvable guessing game or a Coordination version of the guessing game for five rounds. Afterwards they play a 3x3 normal form game for ten rounds with random matching which is either a game solvable through iterated elimination of dominated strategies (IEDS), a pure Coordination game or a Coordination game with pareto ranked equilibria. We find strong evidence that participants do extrapolate between games. Playing a strategically different game hurts compared to the control treatment where no guessing game is played before and in fact impedes convergence to Nash equilibrium in both the 3x3 IEDS and the Coordination games. Playing a strategically similar game before leads to faster convergence to Nash equilibrium in the second game. In the Coordination games some participants try to use the first game as a Coordination device. Our design and results allow us to conclude that participants do not only learn about the population and/or successful actions, but that they are also able to learn structural properties of the games.Game Theory, Learning, Extrapolation

Social networks and trust: not the experimental evidence you may expect

We run a laboratory experiment where 'friendship' networks are generated endogenously within an anonymous group. Our experiment builds on two phases in sequence: a network formation game and a trust game. We find that in those sessions where the trust game is played before the network formation game, the overall level of trust is not significantly different from the one observed in a simple trust game; in those sessions where the trust game is played after the network formation game we find that the overall level of trust is significantly lower than in the simple trust game. Hence surprisingly trust does not increase because of 'enforced reciprocity' and moreover a common social history does affect the level of trust, but in a negative manner. Where network effects matter is in the choice of whom to trust: while we tend to trust less on average those with whom we have already interacted compared to total strangers, past history allows us to select whom to trust relatively more than others

Behavioural patterns in social networks

In this paper, we focus on the analysis of individual decision making for the formation of social networks, using experimentally generated data. We first analyse the determinants of the individual demand for links under the assumption of agents' static expectations. The results of this exercise subsequently allow us to identify patterns of behaviour that can be subsumed in three strategies of link formation: 1) reciprocator strategy - players propose links to those from whom they have received link proposals in the previous round; 2) myopic best response strategy - players aim to profit from maximisation; 3) opportunistic strategy - players reciprocate link proposals to those who have the largest number of connections. We find that these strategies explain approximately 76% of the observed choices. We finally estimate a mixture model to highlight the proportion of the population who adopt each of these strategies

Elective affinities

We propose a marriage model where assortative matching results in equilibrium for reasons other than those driving similar results in the search and matching literature. A marriage is a joint venture where husband and wife contribute to the couple’s welfare by allocating their time to portfolios of risky activities. Men and women are characterised by different preferences over risk and the optimal match is between partners with the same level of risk aversion. In our model no two men (women) rank the same woman (men) as most desirable. Given that there is no unanimous ranking of candidates, everyone marries in equilibrium their most preferred partne

Strategies in social network formation

We run a computerised experiment of network formation where all connections are beneficial and only direct links are costly. Players simultaneously submit link proposals; a connection is made only when both players involved agree. We use both simulated and experimentally generated data to test the determinants of individual behaviour in network formation. We find that approximately 40% of the network formation strategies adopted by the experimental subjects can be accounted for as best responses. We test whether subjects follow alternative patterns of behaviour and in particular if they: propose links to those from whom they have received link proposals in the previous round; propose links to those who have the largest number of direct connections. We find that together with best response behaviour, these strategies explain approximately 75% of the observed choices. We estimate individual propensities to adopt each of these strategies, controlling for group effects. Finally we estimate a mixture model to highlight the proportion of each type of decision maker in the population

Strategies in Social Network Formation

We run a computerised experiment of network formation where all connections are beneficial and only direct links are costly. Players simultaneously submit link proposals; a connection is made only when both players involved agree. We use both simulated and experimentally generated data to test the determinants of individual behaviour in network formation. We find that approximately 40% of the network formation strategies adopted by the experimental subjects can be accounted for as best responses. We test whether subjects follow alternative patterns of behaviour and in particular if they: propose links to those from whom they have received link proposals in the previous round; propose links to those who have the largest number of direct connections. We find that together with best response behaviour, these strategies explain approximately 75% of the observed choices. We estimate individual propensities to adopt each of these strategies, controlling for group effects. Finally we estimate a mixture model to highlight the proportion of each type of decision maker in the population.network formation, experiments, mixture models

Extrapolation in games of coordination and dominance solvable games

We study extrapolation between games in a laboratory experiment. Participants in our experiment first play either the dominance solvable guessing game or a Coordination version of the guessing game for five rounds. Afterwards they play a 3x3 normal form game for ten rounds with random matching which is either a game solvable through iterated elimination of dominated strategies (IEDS), a pure Coordination game or a Coordination game with pareto ranked equilibria. We find strong evidence that participants do extrapolate between games. Playing a strategically different game hurts compared to the control treatment where no guessing game is played before and in fact impedes convergence to Nash equilibrium in both the 3x3 IEDS and the Coordination games. Playing a strategically similar game before leads to faster convergence to Nash equilibrium in the second game. In the Coordination games some participants try to use the first game as a Coordination device. Our design and results allow us to conclude that participants do not only learn about the population and/or succesful actions, but that they are also able to learn structural properties of the games

Are Individuals Profit Maximising in Network Formation? Some Experimental Evidence

We run a computerised experiment of network formation, where all connections are beneficial and only direct links are costly. The game-theoretic basis for the experiment is the model of Goyal and Joshi (2004)where players simultaneously submit link proposals and a connection is made only when both players involved agree. We provide an analysis both at the macro and the micro level. From a macro perspective, in accordance with the exsisting literature, we find that convergence to the stable network architecture is made problematic by the presence of multi- ple equilibria. At the level of the individual, we estimate the probability of a link through a probit model that includes both best-response and behavioural variables. We find strong evidence that both play a role in network formation.We run a computerised experiment of network formation, where all connections are beneficial and only direct links are costly. The game-theoretic basis for the experiment is the model of Goyal and Joshi (2004)where players simultaneously submit link proposals and a connection is made only when both players involved agree. We provide an analysis both at the macro and the micro level. From a macro perspective, in accordance with the exsisting literature, we find that convergence to the stable network architecture is made problematic by the presence of multi- ple equilibria. At the level of the individual, we estimate the probability of a link through a probit model that includes both best-response and behavioural variables. We find strong evidence that both play a role in network formation.Non-Refereed Working Papers / of national relevance onl

The Evolution of Portfolio Rules and the Capital Asset Pricing Model

The aim of this paper is to test the performance of the standard version of CAPM in an evolutionary framework. We imagine a heterogeneous population of long-lived agents who invest their wealth according to differential porfolio rules and ask what is the fate of those who happen to behave as prescribed by CAPM. In a complete securities market with aggregate uncertainty, it is shown that traders who either believe' in CAPM and use it as a rule of thumb, or are endowed with genuine mean-variance preferences, under some very weak conditions, vanish in the long run. A sufficient condition to drive CAPM or mean-variance traders' wealth shares to zero is shown to be that an investor endowed with a logarithmic utility function enters the market. Finally, the robustness of the results is checked, allowing for different kinds of heterogeneity among traders