Do Analysts Tell the Truth? Do Shareholders Listen? An Experimental Study of Analysts\u27 Forecasts and Shareholder Reaction

This work experimentally examines forecasting and trading behavior. Subjects play the role of both analyst and shareholder over the course of experiments consisting of a series of repeated games with or absent conflicts of interest. In a stylized trading setting, I test whether standard equilibrium, normative behavior, or limited strategic reasoning best predicts behavior. In the presence of conflicts of interest a substantial proportion of subjects’ behavior appears non-skeptical in the role of shareholder, though the same subject is deceptive in the role of analyst. Absent conflicts of interest, subjects behavior in the role of shareholder is nearer a best response to the same subject’s behavior as analyst. The results are consistent with limited strategic reasoning and suggest that simply disclosing conflicts of interest does not evoke skepticism of forecasting, nor does the elimination of conflicts of interest in itself induce honesty

Recalibrational Emotions and the Regulation of Trust-Based Behaviors

Though individuals differ in the degree to which they are predisposed to trust or act trustworthy, we theorize that trust-based behaviors are universally determined by the calibration of conflicting short- and long-sighted behavior regulation programs, and that these programs are calibrated by emotions experienced personally and interpersonally. In this chapter we review both the main-stream and evolutionary theories of emotions that philosophers, psychologists, and behavioral economists have based their work on and which can inform our understanding of trust-based behavior regulation. The standard paradigm for understanding emotions is based on mapping their positive and negative affect valence. While Valence Models often expect that the experience of positive and negative affect is interdependent (leading to the popular use of bipolar affect scales), a multivariate “recalibrational” model based on positive, negative, interpersonal, intrapersonal, short-sighted and long-sighted dimensions predicts and recognizes more complex mixed-valence emotional states. We summarize experimental evidence that supports a model of emotionally-calibrated trust regulation and discuss implications for the use of various emotion measures. Finally, in light of these discussions we suggest future directions for the investigation of emotions and trust psychology

Motives for Cooperation in the One-Shot Prisoner’s Dilemma

We investigate the motives for cooperation in the one-shot Prisoner’s Dilemma (PD). A prior study finds that cooperation rates in one-shot PD games can be ranked empirically by the social surplus from cooperation. That study employs symmetric payoffs from cooperation in simultaneous PD games. Hence, in that setting, it is not possible to discern the motives for cooperation since three prominent social welfare criteria, social surplus (efficiency) preferences, Rawlsian maximin preferences, and inequity aversion make the same predictions. In the present paper, we conduct an experiment to identify which of these social preferences best explains differences in cooperation rates and to study the effects of the risk of non-cooperation

Predictive Mind Reading from First and Second Impressions: Better-than-chance Prediction of Cooperative Behavior

People’s appearance and behaviors in strategic interactions provide a variety of informative clues that can help people accurately predict beliefs, intentions, and future behaviors. Mind reading mechanisms may have been selected for that allow for better-than-chance prediction of others’ strategic social propensities based on the sparse information available when forming first and second impressions. We hypothesize that first impressions are based on prior beliefs and available information gleaned from another’s description and appearance. For example, where another’s gender is identified, prior gender stereotypes could influence expectations and correct guesses about them. We also hypothesize that mind reading mechanisms use second impressions to predict behavior: using new knowledge of past behaviors to predict future behavior. For example, knowledge of the last round behaviors in a repeated strategic interaction should improve the accuracy of guesses about the next round behavior. We conducted a two-part study to test our predictive mind reading hypotheses and to evaluate evidence of accurate cheater and cooperator detection. First, across multiple rounds of play between matched partners, we recorded thin slice videos of university students just prior to their choices in a repeated Prisoner’s Dilemma. Subsequently, a worldwide sample of raters recruited online evaluated either thin-slice videos, photo stills from the videos, no images with gender labeled, or no images with gender blinded for each target. Raters guessed players’ Prisoner’s Dilemma choices in the first round, and, again, in the second round after viewing first round behavior histories. Indicative of mindreading: in all treatments where targets are seen, or their gender is labeled, or their behavioral history is provided, raters guess unacquainted players’ behavior with above-chance accuracy. Overall, cooperators are more accurately detected than cheaters. In both rounds, both cooperator and cheater detection are significantly more accurate when players’ photo or video are seen, where their gender is revealed by image or label, and under conditions with behavioral history. These results provide supporting evidence for predictive mind reading abilities that people use to efficiently detect cooperators and cheaters with better-than-chance accuracy under sparse information conditions. This ability to apply and hone predictive mindreading may help explain why cooperation is commonly observed among strangers in everyday social dilemmas

The Conservatism Principle and Asymmetric Preferences Over Reporting Errors

At present, accounting conservatism is generally viewed from a measurement or reporting perspective. In contrast, we consider whether it relates to a moral rule of conduct. Conservatism has been described as deriving from a preference for reporting errors to be in the direction of understatement rather than overstatement. We experimentally pair Reporters who provide information with Users who rely on the information. We posit that under misaligned incentives that motivate aggressive reporting, Users view an aggressive report as reflecting Reporters’ exploitative intent and expect that a social norm prohibiting aggressive reporting applies. We predict that Users use noisy reporting errors to gauge Reporters’ norm compliance. Consistent with this we find that, ceteris paribus, Users prefer not to be paired with Reporters who produce overstatement errors that are likely to reflect aggressive reporting. This preference, revealed through Users’ incentivized actions, is both inconsistent with neoclassical economic models and cannot be explained by loss aversion. Alternatively, when Reporters’ motives are aligned with Users’, we find no such preference. While our evidence is indirect, it opens the possibility that conservatism emerged from a norm that enhances trust and cooperation among economic agents. We believe this insight can open new possibilities for conservatism research

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

How Do Reward Versus Penalty Framed Incentives Affect Diagnostic Performance in Auditing?

Prior research examines how rewards versus economically equivalent penalties affect effort. However, accountants perform various diagnostic analyses that involve more than exerting effort. For example, auditors often need to identify whether a material misstatement is the underlying cause of a phenomenon among the possible causes. Testing helps identify the cause, but testing is costly. When participants are incentivized to test accurately (rather than test more) and objectively (unbiased between testing and not testing), we find that framing the incentives as rewards versus equivalent penalties increases testing by lowering the subjective testing criterion and by increasing the assessed risk of material misstatement. However, testing increases primarily when a misstatement is absent, causing more false alarms under a reward frame with no improvement in misstatement detection. Penalties are pervasive in auditing. Our study suggests that rewards are more effective for increasing testing, and that increasing testing blindly can impair audit efficiency

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‟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