Information Mirages in Experimental Asset Markets

We investigate behavior in laboratory asset markets in which traders are sometimes informed of asset values. We test whether traders overreact to uninformative trades, mistakenly inferring in-formation from them. The existence of price "mirages," caused by such mistakes, might ex-plain why asset prices seem to be excessively volatile

Trust among Strangers

The trust building process is basic to social science. We investigate it in a laboratory setting using a novel multi-stage trust game where social gains are achieved if players trust each other in each stage. And in each stage, players have an opportunity to appropriate these gains or be trustworthy by sharing them. Players are strangers because they do not know the identity of others and they will not play them again in the future. Thus there is no prospect of future interaction to induce trusting behavior. So, we study the trust building process where there is little scope for social relations and networks. Standard game theory, which assumes all players are opportunistic, untrustworthy, and should have zero trust for others is used to construct a null hypothesis. We test whether people are trusting or trustworthy and examine how inferring the intentions of those who trust affects trustworthiness. We also investigate the effect of stake on trust, and study the evolution of trust. Results show subjects exhibit some degree of trusting behavior though a majority of them are not trustworthy and claim the entire social gain. Players are more reluctant to trust in later stages than in earlier ones and are more trustworthy if they are certain of the trustee’s intention. Surprisingly, subjects are more trusting and trustworthy when the stake size increases. Finally, we find the sub- population who invests in initiating the trust building process modifies its trusting behavior based on the relative fitness of trust.Experimental Economics, Behavioral Economics

Iterated dominance and iterated best response in experimental "p-beauty contests"

Picture a thin country 1000 miles long, running north and south, like Chile. Several natural attractions are located at the northern tip of the country. Suppose each of n resort developers plans to locate a resort somewhere on the country's coast (and all spots are equally attractive). After all the resort locations are chosen, an airport will be built to serve tourists, at the average of all the locations including the natural attractions. Suppose most tourists visit all the resorts equally often, except for lazy tourists who visit only the resort closest to the airport; so the developer who locates closest to the airport gets a fixed bonus of extra visitors. Where should the developer locate to be nearest to the airport? The surprising game-theoretic answer is that all the developers should locate exactly where the natural attractions are. This answer requires at least one natural attraction at the northern tip, but does not depend on the fraction of lazy tourists or the number of developers (as long as there is more than one)

Experimental Tests of a Sequential Equilibrium Reputation Model

We test whether a model of reputation formation in an incomplete information game, using sequential equilibrium, predicts behavior of players in an experiment. Subjects play an abstracted lending game: a B player lends or does not lend; then if B lends, an E player can pay back or renege. The game is played 8 times, and there is a small controlled probability that the E player's induced preferences make him prefer to pay back (but usually he prefers to renege). In sequential equilibrium, even E players who prefer to renege should pay back in early periods of the game, and renege with increasing frequency in later periods, to establish reputations for preferring to pay back. After many repetitions of the 8-period game, actual play is roughly like the sequential equilibrium, except that E players pay back later in the game and more often than they should. This behavior is rational if B players have a "homemade" prior probability of .17 (in addition to the controlled probability) that E players will prefer to pay back. We conclude that sequential equilibrium with homemade incomplete information describes actual behavior well enough that it is plausible to apply it to theoretical settings where individuals make choices (e.g., product markets, labor markets, bargaining)

A Laboratory Investigation of Multiperson Rationality and Presentation Effects

This paper reports the results of laboratory experiments in which subjects were presented with different two-person decision problems in both their extensive and normal forms. All games generated the same equilibrium outcomes. Our results indicate that the presentation of the decision problem significantly affects the strategy chosen. Surprisingly, these presentation effects were most prominent in the simplest games where differences in presentation would seem most transparent. It appears that subjects are much more likely to use (and fear) incredible threats when the problem is presented as a one-stage rather than as a multistage game

ASYMMETRIC TOURNAMENTS, EQUAL OPPORTUNITY LAWS AND AFFIRMATIVE ACTION: SOME EXPERIMENTAL RESULT

economic theory ; economic equilibrium ; experiments ; economics