nep-exp New Economics Papers
on Experimental Economics
Issue of 2016‒09‒11
twenty-two papers chosen by
Daniel Houser
George Mason University

  1. Self-Chosen Goals : Incentives and Gender Differences (revision of 2015-021) By Dalton, P.S.; Gonzalez Jimenez, V.H.; Noussair, Charles
  2. Inequality Aversion and Coalition Formation By David M. McEvoy; John K. Stranlund
  3. Do Economic Inequalities Affect Long-Run Cooperation? By Gabriele Camera; Cary Deck; David Porter
  4. Endogenous Market Formation and Monetary Trade: an Experiment By Gabriele Camera; Dror Goldberg; Avi Weiss
  5. Temporal stability, cross-validity, and external validity of risk preferences measures: experimental evidence from a UK representative sample By Matteo M. Galizzi; Sara R. Machado; Raffaele Miniaci
  6. Prudence, Personality, Cognitive Ability and Emotional State By Breaban, Adriana; van de Kuilen, Gijs; Noussair, Charles
  7. Overcoming Salience Bias: How Real-Time Feedback Fosters Resource Conservation By Degen, Kathrin; Fleisch, Elgar; Götte, Lorenz; Lalive, Rafael; Staake, Thorsten; Tasic, Vojkan; Tiefenbeck, Verena
  8. Believe Me, You are (not) that Bad By Gonzalez Jimenez, Victor
  9. Mental capabilities, trading styles, and asset market bubbles: theory and experiment By Andreas Hefti; Steve Heinke; Frédéric Schneider
  10. Monetary and Fiscal Policy Design at the Zero Lower Bound - Evidence from the Lab By Hommes, C.H.; Massaro, D.; Salle, I.
  11. Microfoundations for Switching Behavior in Heterogeneous Agent Models: An Experiment By Anufriev, M.; Bao, T.; Tuinstra, J.
  12. Can Myopic Loss Aversion Explain the Equity Premium Puzzle? Evidence from a Natural Field Experiment with Professional Traders By Francis Larson; John List; Robert Metcalfe
  13. Networks of Heterogeneous Expectations in an Asset Pricing Market By Makarewicz, T.A.
  14. Simple Forecasting Heuristics that Make us Smart: Evidence from Different Market Experiments By Anufriev, M.; Hommes, C.H.; Makarewicz, T.A.
  15. Path Dependent Coordination of Expectations in Asset Pricing Experiments: a Behavioral Explanation By Agliari, A.; Hommes, C.H.; Pecora, N.
  16. When Speculators Meet Constructors: Positive and Negative Feedback in Experimental Housing Markets By Hommes, C.H.; Bao, T.
  17. Insights in cognitive patterns : Essays on heuristics and identification By Rothengatter, Marloes
  18. Learning in a Bandit Game and Technology Choice By Kaywana Raeburn; Jim Engle-Warnick; Sonia Laszlo; Jian Li
  20. Information and Learning in Stated-Preference Studies By Mikołaj Czajkowski; Nick Hanley; Jacob LaRiviere; William S. Neilson; Katherine Simpson
  21. Trust and Trustworthiness under Information Asymmetry and Ambiguity By Irma Clots-Figueras; Roberto Hernán González; Praveen Kujal
  22. Centrality Rewarding Shapley and Myerson Values for Undirected Graph Games By Anna Khmelnitskaya; Gerard van der Laan; Dolf Talman

  1. By: Dalton, P.S. (Tilburg University, Center For Economic Research); Gonzalez Jimenez, V.H. (Tilburg University, Center For Economic Research); Noussair, Charles (Tilburg University, Center For Economic Research)
    Abstract: To boost employees’ performance, firms often offer monetary bonuses when production goals are reached. However, the available evidence indicates that the particular level at which a goal is set is critical to the effectiveness of this practice. Goals must be challenging yet achievable. Computing optimal goals when employees have private information about their own abilities may be impossible for an employer. To solve this problem, we propose a compensation scheme, in which workers set their own production goals and bonuses. We provide a simple model of self-chosen goals and test its predictions in the laboratory. The model predicts that (a) the self-chosen goal contract is more cost effective than a piece rate contract for an employer interested in attaining a desired level of output, and that (b) workers set goals that they systematically outperform. Our experimental data support both predictions. We also observe sharp gender differences in the experiment. The self-chosen goal contract increases the performance of men but not of women relative to a piece rate contract. Women set lower goals, but outperform them to a greater extent than men.
    Keywords: contracts; bonus ; goal-dependant preferences; endogenous goals; productivity; gender differences
    JEL: C91 C92 J16 J24
    Date: 2016
  2. By: David M. McEvoy; John K. Stranlund
    Abstract: We explore the formation of coalitions to provide a public good when some players are averse to payoff inequality between coalition members and non-members. A model is presented to demonstrate how inequality-averse preferences could cause players to deliberately block profitable but inequitable coalitions from forming, and how the likelihood of such blocks is affected by the magnitude of payoff inequality. We then empirically examine coalition formation rates using laboratory experiments. Our results show that profitable coalitions are less likely to form the bigger the gap in payoffs between members and freeriding non-members. The experimental design allows us to tease out potentially confounding effects between the level of inequality and the minimum number of players required to make the coalition profitable. As predicted, controlling for the size of the participation threshold, we find that coalition formation rates fall as the payoff gap between members and non-members is increased. Key Words: self-enforcing agreements; inequality aversion; coalitions; experiments; public goods
    Date: 2016
  3. By: Gabriele Camera (Chapman University and University of Basel); Cary Deck (University of Arkansas and Chapman University); David Porter (Chapman University)
    Abstract: Does inequality affect a group’s cohesion and ability to prosper? Participants in laboratory economies played an indefinite sequence of helping games in random, anonymous pairs. A coin flip determined donor and recipient roles in each pair. This random shock ensured equality of opportunity but not of results, because earnings depended on realized shocks. We manipulated the ability to condition choices on this uncontrollable inequality source. In all treatments, uncertain ending supports multiple Pareto-ranked equilibria, including full cooperation. Theoretically, inequalities do not alter the incentives’ structure. Empirically, inequality disclosures altered conduct, weakened norms of mutual support and reduced efficiency.
    Keywords: experiments, indefinitely repeated games, social norms, social dilemmas
    JEL: C70 C90 D03 E02
    Date: 2016
  4. By: Gabriele Camera (Chapman University and University of Basel); Dror Goldberg (The Open University of Israel); Avi Weiss (Bar-Ilan University and Taub Center for Social Policy Research of Israel and IZA)
    Abstract: The theory of money assumes decentralized bilateral exchange and excludes centralized multilateral exchange. However, endogenizing the exchange process is critical for understanding the conditions that support the use of money. We develop a “travelling game” to study the spontaneous emergence of decentralized and centralized exchange, theoretically and experimentally. Players located on separate “islands” can either trade locally, or pay a cost to trade elsewhere, so decentralized and centralized markets can both emerge in equilibrium. The latter maximize trade meetings and are socially efficient; the former minimize trade costs through the use of money. In the laboratory, centralized exchange more frequently emerges when subjects perform diversified economic tasks, but also when they interact in large groups. This shows that to understand the emergence of money it is important to amend the theory of money such that the market structure is endogenized.
    Keywords: endogenous institutions, macroeconomic experiments, matching, coordination, markets, money
    JEL: E4 E5 C9 C92
    Date: 2016
  5. By: Matteo M. Galizzi; Sara R. Machado; Raffaele Miniaci
    Abstract: We conduct an “artefactual” field experiment to incorporate three different risk preferences measures within the Innovation Panel (IP) of the UK Household Longitudinal Survey (UKHLS). We randomly allocate to an experimental module a nationally representative sample of 661 adult respondents to the IP Wave 6 (IP6). These subjects respond to the incentive-compatible tasks by Holt and Laury (2002) (HL), and by Binswanger (1980, 1981) and Eckel and Grossman (2008) (B-EG), and to the SOEP survey questions by Dohmen et al. (2011) for self-reported willingness to take risks in general (SOEP-G), in finance (SOEP-F), and in health (SOEP-H). One year later (IP7) the same measures are repeated for 413 of these respondents. This design allows us to systematically test, for a UK representative sample, the validity of the three measures along three dimensions. First, we look at cross-validity by testing how responses at one point in time correlate across the three tasks, assuming a Constant Relative Risk Aversion (CRRA) utility function. Second, we look at temporal stability by comparing the responses across IP6 and IP7. Third, we look at external validity by considering a range of risky health and financial behaviors in the UKHLS. We have three main findings. First, concerning cross-validity, we find evidence that the different measures generally correlate and map into each other, although their associations are not perfect. Second, concerning temporal stability, there are significant and positive correlations of the B-EG, HL, and SOEP measures across IP6 and IP7. Finally, we find mixed evidence concerning external validity.
    Keywords: Field Experiments; Risk Aversion; Behavioral Data Linking; Health Behaviors
    JEL: C93 D81
    Date: 2016–08–12
  6. By: Breaban, Adriana (Tilburg University, Center For Economic Research); van de Kuilen, Gijs (Tilburg University, Center For Economic Research); Noussair, Charles (Tilburg University, Center For Economic Research)
    Abstract: We report an experiment to consider the emotional correlates of prudent decision making. In the experiment, we present subjects with lotteries and measure their emotional response with facial recognition software. They then make binary choices between risky lotteries that distinguish prudent from imprudent individuals. They also perform tasks to measure their cognitive ability and a number of personality characteristics. We find that a more negative emotional state correlates with greater prudence. Higher cognitive ability and less conscientiousness is also associated with greater prudence.
    Keywords: emotions; prudence; personality; cognitive ability
    JEL: C91
    Date: 2016
  7. By: Degen, Kathrin; Fleisch, Elgar; Götte, Lorenz; Lalive, Rafael; Staake, Thorsten; Tasic, Vojkan; Tiefenbeck, Verena
    Abstract: Inattention and imperfect information bias behavior toward the salient and immediately visible. This distortion causes costs to individuals, the organizations they work in, and soci- ety at large. We show that an effective way to overcome this bias is making the implications of one's behavior salient in real time, while individuals can directly adapt. In a large-scale field experiment, we gave participants real-time feedback on the resource consumption of a daily, energy-intensive behavior (showering). We find that real-time feedback reduced re- source consumption for the target behavior by 22%. At the household level, this led to much larger conservation gains in absolute terms than conventional policy interventions that provide aggregate feedback on resource use. High-baseline users displayed a larger conservation effect, in line with the notion that real-time feedback helps eliminate "slack" in resource use. The approach is cost-effective, technically applicable to the vast majority of households, and generated savings of 1.2 kWh per day and household, which exceeds the average energy use for lighting.The intervention also shows how digitalization in our every- day lives makes information available that can help individuals overcome salience bias and act more in line with their preferences.
    Keywords: decision making; energy conservation; environmental behavior; randomized controlled trials; water conservation
    JEL: C93 D03 H41
    Date: 2016–08
  8. By: Gonzalez Jimenez, Victor (Tilburg University, Center For Economic Research)
    Abstract: This paper studies the effect of incentive schemes incorporating status classes on workers’ performance. I focus on performance comparisons between similarly skilled workers that belong to different status classes. A theoretical framework predicts that, under certain conditions, low ability workers attain high performance when they are assigned to a high rather than a low status class, and that high ability workers achieve high performance irrespective of the received status. These predictions are tested in a laboratory setting, where subjects are randomly assigned to a high status or a low status condition and constant performance feedback is provided. The experimental data support both predictions: low ability subjects assigned to the high status condition outperform their low status counterparts by 0.53 standard deviations in a cognitively challenging task, and high ability subjects display high performance outcomes in both status classes. Moreover, I explore the subjects’ beliefs about performance as a mechanism to explain these results. I find that low ability subjects assigned to the high status exhibit performance targets that were as high as those elicited by high ability participants. This suggests that these workers used status to believe that they were good performers, and performed accordingly.
    Keywords: performance; beliefs; experiments; cognition
    JEL: D03 C91 D84 M54 Z13
    Date: 2016
  9. By: Andreas Hefti; Steve Heinke; Frédéric Schneider
    Abstract: We propose that heterogeneous asset trading behavior is the result of two distinct, non-convertible mental dimensions: analytical (“quantitative”) capability and mentalizing (“perspective-taking”) capability. We develop a framework of mental capabilities that yields testable predictions about individual trading behavior, revenue distribution and aggregate outcomes. The two-dimensional structure of mental capabilities predicts the existence of four mental types with distinguishable trading patterns and revenues. Individuals will trade most successfully if and only if they have both capabilities. On the other hand, subjects who can mentalize well but have poor analytical capability will suffer the largest losses. As a consequence, being able in just one dimension does not assure trading success. We test these implications in a laboratory environment, where we first independently elicit subjects’ capabilities in both dimensions and then conduct a standard asset market experiment. We find that individual trading gains and patterns are consistent with our theoretical predictions. Our results suggest that two mental dimensions are necessary to encompass the complex heterogeneous behaviors in asset markets; a one-dimensional measure of mental capability will lead to biased conclusions. The findings have potential implications for financial institutions, which can use the measures to select successful traders, or for policy-makers, helping them to prevent the formation of asset bubbles. Finally, our conceptual framework and the empirical screening method could be applied to explain heterogeneous behavior in other games.
    Keywords: Asset markets, heterogeneity, mental capabilities
    JEL: G02 C92
    Date: 2016–08
  10. By: Hommes, C.H. (University of Amsterdam); Massaro, D. (University of Amsterdam); Salle, I. (University of Amsterdam)
    Abstract: The global economic crisis of 2007-8 pushed many advanced economies into a liquidity trap, a macroeconomic scenario characterised by nominal rates at the zero lower bound (ZLB), low inflation and output below trend. We design an experiment to generate empirical evidence on the effectiveness of policies aimed at managing expectations against liquidity traps in a controlled laboratory environment where expectations are elicited directly from human subjects. Our results suggest that monetary policy alone is not sufficient to insulate the economy from the risk of falling into a liquidity trap, even if it preventively cuts the interest rate when inflation threatens to fall below a certain threshold. However, such policy augmented with a fiscal switching rule succeeds in avoiding and escaping liquidity trap episodes. We also measure larger-than-unity fiscal multipliers when monetary policy is constrained by the ZLB. Experimental results in different treatments are well explained by adaptive learning.
    Date: 2015
  11. By: Anufriev, M. (University of Technology, Sydney); Bao, T. (University of Groningen); Tuinstra, J. (University of Amsterdam)
    Abstract: We run a laboratory experiment to study how people switch between several profitable alternatives, framed as mutual funds, in order to provide a microfoundation for so-called heterogeneous agent models. The participants in our experiment have to choose repeatedly between two, three or four experimental funds. The time series of fund returns are exogenously generated prior to the experiment and participants are paid for each period according to the return of the fund they choose. For most cases participants' decisions can be successfully described by a discrete choice switching model, often applied in heterogeneous agent models, provided that a predisposition towards one of the funds is included. The estimated intensity of choice parameter of the discrete choice model depends on the structure of the fund returns. In particular, it increases with correlation between past and future returns. This suggests people do not myopically chase past returns, but are more likely to do so when past returns are more predictive of future returns, a feature that is absent in the standard heterogeneous agent models.
    Date: 2015
  12. By: Francis Larson; John List; Robert Metcalfe
    Abstract: Behavioral economists have recently put forth a theoretical explanation for the equity premium puzzle based on combining myopia and loss aversion. Complementing the behavioral theory is evidence from laboratory experiments, which provide strong empirical support consistent with myopic loss aversion (MLA). Yet, whether, and to what extent, such preferences underlie behaviors of traders in their natural domain remains unknown. Indeed, a necessary condition for the MLA theory to explain the equity premium puzzle is for marginal traders in markets to exhibit such preferences. Using minute-by-minute trading observations from over 864,000 price realizations in a natural field experiment, we find data patterns consonant with MLA: in their normal course of business, professional traders who receive infrequent price information invest 33% more in risky assets, yielding profits that are 53% higher, compared to traders who receive frequent price information. Beyond testing theory, these results have important implications for efficient resource allocation as well as characterizing the optimal structure of social and economic policies.
    Date: 2016
  13. By: Makarewicz, T.A. (University of Amsterdam)
    Abstract: The paper studies the e ect of information networks on learning to forecast in an asset pricing market. Financial traders have heterogeneous price expectations, are influenced by friends and seem to be prone to herding. However, in laboratory experiments subjects use contrarian strategies. Theoretical literature on learning in networks is scarce and cannot explain this conundrum (Panchenko et al., 2013). The paper follows Anufriev et al. (2014) and investigates an agent-based model, in which agents forecast price with a simple general heuristic: adaptive and trend extrapolation expectations, with an additional term of (dis-)trust towards their friends' mood. Agents independently use Genetic Algorithms to optimize the parameters of the heuristic. The paper considers friendship networks of symmetric (regular lattice, fully connected) and asymmetric architecture (random, rewired, star). The main finding is that the agents learn contrarian strategies, which amplifies market turn-overs and hence price oscillations. Nevertheless, agents learn similar behavior and their forecasts remain well coordinated. The model therefore o ers a natural interpretation for the di erence between the experimental stylized facts and market surveys.
    Date: 2015
  14. By: Anufriev, M. (University of Technology, Sydney); Hommes, C.H. (University of Amsterdam); Makarewicz, T.A. (University of Amsterdam)
    Abstract: We study a model in which individual agents use simple linear first order price forecasting rules, adapting them to the complex evolving market environment with a smart Genetic Algorithm optimization procedure. The novelties are: (1) a parsimonious experimental foundation of individual forecasting behaviour; (2) an explanation of individual and aggregate behavior in four different experimental settings, (3) improved one-period and 50-period ahead forecasting of lab experiments, and (4) a characterization of the mean, median and empirical distribution of forecasting heuristics. The median of the distribution of GA forecasting heuristics can be used in designing or validating simple Heuristic Switching Model.
    Date: 2015
  15. By: Agliari, A. (Catholic University, Piacenza); Hommes, C.H. (University of Amsterdam); Pecora, N. (Catholic University, Piacenza)
    Abstract: In the learning-to-forecast laboratory experiments in Hommes et al. (2005), three different types of aggregate asset price behavior have been observed: monotonic convergence to the stable fundamental steady state, dampened price oscillations and permanent price oscillations. We present a simple behavioral 2-type heuristics switching model explaining individual as well as aggregate behavior in the experiment. Based on relative performance, agents switch between a simple trend-following and an anchor and adjustment heuristic that differ in how much weight is given to the long run average price level. The nonlinear switching model exhibits path dependence through co-existence of a locally stable fundamental steady state and a stable (quasi-)periodic orbits. Depending on initial states, agents coordinate individual expectations either on a stable fundamental steady state path or on almost self-fulfilling persistent price fluctuations around the fundamental steady state.
    Date: 2015
  16. By: Hommes, C.H. (University of Amsterdam); Bao, T. (University of Groningen)
    Abstract: Asset markets are characterized by positive feedback through speculative demand. But housing markets distinguish themselves from other asset markets in that the supply of housing is endogenous, and adds negative feedback to the market. We design an experimental housing market and study how the strength of the negative feedback, i.e., the supply elasticity, a ects market stability. In the absence of endogenous housing supply, the experimental markets exhibit large bubbles and crashes because speculators coordinate on trend-following expectations. When the positive feedback through speculative demand is o set by the negative feedback of elastic housing supply the market stabilizes and prices converge to fundamental value. Individual expectations and aggregate market outcome is well described by a behavioral forecasting heuristics model. Our results suggest that negative feedback policies may stabilize speculative asset bubbles.
    Date: 2015
  17. By: Rothengatter, Marloes (Tilburg University, School of Economics and Management)
    Abstract: People are inclined to find patterns in everything they sense, even if there is no pattern to discover. Humans use action-oriented mental patterns as rules of thumb, so called heuristics, in speedy decision-making. At the same time, we see this desire for pattern finding in social orderliness, in cognitive social psychology, when studying identification. Drawing on analyses of three distinct datasets, this dissertation presents four interrelated studies that aim to advance our understanding of human thinking processes and behavior. Social identification and heuristics are the central topics of this dissertation. Our first study on biases reveals that rational information processing reduces some biases, and that an interaction between rational and intuitive information processing potentially reduces biases to a further extent. In the second study, an experimental approach is taken, regarding the preference for ambiguity in a voting context. By zooming in on projection bias, we come up with an alternative explanation for the preference for ambiguity in voting. The third study is conducted in an organizational setting focusing on organizational identification and its interaction with task autonomy as a determinant of job satisfaction. We find that organizational identification acts as a buffer for the negative effects of low task autonomy. In the fourth study, the focus is again on voting ambiguity, but now with a focus on identification, which seems to have an effect on voting ambiguity as well.
    Date: 2016
  18. By: Kaywana Raeburn; Jim Engle-Warnick; Sonia Laszlo; Jian Li
    Abstract: We present a decision-making experiment, conducted in the field, that explores the extent to which learning in a bandit game predicts technology choice on the farm. We find evidence of heterogeneity of learning in the bandit game, including overweighting of winning draws and Bayesian updating. Our results suggest that learners who overweight recent draws are more likely to have adopted new farm crops within the previous year.
    Keywords: Bandit Games, Technology Choice, Field Experiment,
    JEL: C90 O33 Q16
    Date: 2016–08–29
  19. By: Ro’i Zultan (BGU); Oded Ravid (BGU); Miki Malul (BGU)
    Keywords: public sector, incentives, subjective well being, job satisfaction, laboratory experiment.
    JEL: C91 J28 J45
    Date: 2016
  20. By: Mikołaj Czajkowski (Faculty of Economics, University of Warsaw); Nick Hanley (Department of Geography and Sustainable Development, University of St. Andrews); Jacob LaRiviere (Department of Economics, University of Tennessee); William S. Neilson (Department of Economics, University of Tennessee); Katherine Simpson (Economics Division, University of Stirling, Scotland)
    Abstract: We use experimental variation to influence how people learn a given amount of objective, scientific information about an unfamiliar public good. We then estimate the impact of treatment on valuations for that good in a stated preference survey. Our main treatment, a pre-survey multiple choice quiz about objective public good attributes, increased learning rates by over 60%. We find that despite increasing learning and retention rates, treatment had no statistically significant impact on mean nor variance of the distribution of valuations. We show with a very simple theoretical model this result is consistent with a model of confirmatory bias used by agents in stated preference surveys and inconsistent with other models of preference formation.
    Keywords: Information, Updating, Preferences, Public Goods
    JEL: D01 D83 Q41
    Date: 2016
  21. By: Irma Clots-Figueras (Universidad Carlos III de Madrid); Roberto Hernán González (University of Nottingham and Economic Science Institute, Chapman University); Praveen Kujal (Middlesex University and Economic Science Institute, Chapman University)
    Abstract: We introduce uncertainty and ambiguity in the standard investment game. In the uncertainty treatment, investors are informed that the return of the investment is drawn from a publicly known distribution function. In the ambiguity treatment, investors are not informed about the distribution function. We find that both trust and trustworthiness are robust to the introduction of these changes.
    Date: 2016
  22. By: Anna Khmelnitskaya (St.Petersburg State University, Russia); Gerard van der Laan (VU University Amsterdam, the Netherlands); Dolf Talman (Tilburg University, the Netherlands)
    Abstract: In this paper we introduce two values for cooperative games with communication graph structure. For cooperative games the shapley value distributes the worth of the grand coalition amongst the players by taking into account the worths that can be obtained by any coalition of players, but does not take into account the role of the players when communication between players is restricted. Existing values for communication graph games as the Myerson value and the average tree solution only consider the worths of connected coalitions and respect only in this way the communication restrictions. They do not take into account the position of a player in the graph in the sense that, when the graph is connected, in the unanimity game on the grand coalition all players are treated equally and so players with a more central position in the graph get the same payoff as players that are not central. The two new values take into account the position of a player in the graph. The first one respects centrality, but not the communication abilities of any player. The second value reflects both centrality and the communication ability of each player. That implies that in unanimity games players that do not generate worth but are needed to connect worth generating players are treated as those latter players, and simultaneously players that are more central in the graph get bigger shares in the worth than players that are less central. For both values an axiomatic characterization is given on the class of connected cycle-free graph games.
    Keywords: cooperative game; Shapley value; communication graph; restricted cooperation; centrality
    JEL: C71
    Date: 2016–09–02

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