Do Analysts Tell the Truth? Do Shareholders Listen? An Experimental Study of Analysts' 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 con icts 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 con icts 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 con icts 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 con icts of interest does not evoke skepticism of forecasting, nor does the elimination of con icts of interest in itself induce honesty.Experimental finance, under-reaction, overreaction, behavior, price inertia, risk aversion

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.experiment, level-k thinking, strategic communication, risk preference, beliefs

Generating ambiguity in the laboratory

This article develops a method for drawing samples from which it is impossible to infer any quantile or moment of the underlying distribution. The method provides researchers with a way to give subjects the experience of ambiguity. In any experiment, learning the distribution from experience is impossible for the subjects, essentially because it is impossible for the experimenter. We describe our method mathematically, illustrate it in simulations, and then test it in a laboratory experiment. Our technique does not withhold sampling information, does not assume that the subject is incapable of making statistical inferences, is replicable across experiments, and requires no special apparatus. We compare our method to the techniques used in related experiments that attempt to produce an ambiguous experience for the subjects.ambiguity; Ellsberg; Knightian uncertainty; laboratory experiments; ignorance; vagueness JEL Classications: C90; C91; C92; D80; D81

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

Analysts, Incentives, and Exaggeration

Sell-side analysts are compensated, at least in part, by brokerage commissions. These commissions create an incentive to bias forecasts to generate trade. Thus, analysts have clear economic incentives to deceive and traders have economic incentives to detect deception. Prior analytical theories of information transmission games starkly predict that there will always be some deception (with trade) at best and uninformative messages (and no trade) at worst when the sender's and receiver's incentives are not aligned. Prior experimental evidence of information transmission games show senders do elect to deceive, although they send messages more informative than theory predicts. Likewise, receivers rely more upon messages than theory predicts. Can behavior that deviates from prediction be explained by normative social behavior, such as trust and honesty? Alternatively, are subjects boundedly rational, failing to sufficiently consider other players' incentives when predicting their decisions? To answer these questions, I design and conduct an experiment to investigate whether forecasting and trading behaviors are best explained by analytical theory, limited strategic sophistication, or social norms. The experimental results confirm a majority of subjects adopt dishonest forecasting strategies, but at the same time, a majority of subjects adopts trusting trading strategies. Additionally, subjects do not appear to revise trading behavior despite evidence of deceptive forecasts. The results suggest subjects' behavior within the setting is better explained by limited strategic sophistication than by social normative behavior or sequential rationality. Les analystes du « côté vendeur » sont rémunérés, du moins en partie, au moyen de commissions de courtage. Ces commissions représentent une incitation à fausser les prévisions dans le but d'accroître les activités du marché. Ainsi, les analystes font l'objet de stimulants économiques clairs qui les portent à décevoir, tandis que les négociateurs ont des stimulants économiques qui les incitent à détecter la déception. Les théories analytiques avancées antérieurement à partir des jeux de transmission de l'information prédisent, de façon catégorique, qu'il existera toujours une certaine déception (avec transaction) dans le meilleur des cas et des messages dénudés de renseignements (et sans transaction) dans le pire des cas, à moins que les stimulants de l'émetteur et du récepteur ne concordent. La preuve expérimentale qui a été faite dans le passé par les jeux de transmission de l'information a démontré que les émetteurs choisissent effectivement de décevoir, même si leurs messages sont plus informatifs que la théorie laisse entendre. De la même façon, les récepteurs comptent davantage sur les messages que ce qui est proposé par la théorie. Le comportement qui s'écarte des prédictions peut-il s'expliquer par un comportement social normatif, en l'occurrence la confiance et l'honnêteté? Par ailleurs, les sujets font-ils preuve de rationalité limitée et négligent-ils de considérer suffisamment les stimulants des autres joueurs au moment de prédire leurs décisions? Dans le but de répondre à ces questions, je mets au point, puis je conduis une expérience visant à observer les comportements liés aux prévisions et à la négociation et à établir si ces comportements s'expliquent mieux par la théorie analytique, la sophistication stratégique limitée ou les normes sociales. Les résultats de l'expérience confirment que, d'une part, une majorité de sujets adoptent des stratégies prévisionnelles malhonnêtes et, d'autre part, une majorité de sujets adoptent des stratégies commerciales fondées sur la confiance. De plus, les sujets ne semblent pas revoir leur comportement face au marché, malgré l'évidence de prévisions décevantes. Les résultats portent à croire qu'on peut mieux expliquer le comportement des sujets, dans un contexte donné, par la sophistication stratégique limitée que par le comportement social normatif ou la rationalité séquentielle.analyst forecast, levels of sophistication, social norm, bounded rationality, trust, honesty , prédictions des analystes, niveau de sophistication, norme sociale, rationnalité limitée, confiance, honnêteté

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

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

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