Economic Theory Commons^™

How To Discipline Financial Markets: Reputation Is Not Enough, Maria Bigoni, Gabriele Camera, Marco Casari

ESI Working Papers

Historically, shocks originating in the financial sector often spilled over into the real sector with dramatic consequences. We study in the lab how interventions targeting disclosure and capital requirements of financial intermediaries can reduce insolvencies or prevent their negative effects from propagating to the broader economy. In our two-sector economy, consumers and producers can fund financial intermediaries, who, in turn, provide them with liquidity to settle trades. However, intermediaries may undertake risky investments and become insolvent, which depresses real economic activity. In the experiment, insolvencies were frequent. As a consequence, consumers and producers often refused to fund intermediaries, which lowered …

Subjective Well-Being Across The Life Course Among Non-Industrialized Populations, Michael Gurven, Yoann Buoro, Daniel Eid Rodriguez, Katherine Sayre, Benjamin Trumble, Aili Pyhälä, Hillard Kaplan, Arild Angelsen, Jonathan Stieglitz, Victoria Reyes-Garcia

ESI Publications

Subjective well-being (SWB) is often described as being U-shaped over adulthood, declining to a midlife slump and then improving thereafter. Improved SWB in later adulthood has been considered a paradox given age-related declines in health and social losses. While SWB has mostly been studied in high-income countries, it remains largely unexplored in rural subsistence populations lacking formal institutions that reliably promote social welfare. Here, we evaluate the age profile of SWB among three small-scale subsistence societies (n = 468; study 1), forest users from 23 low-income countries (n = 6987; study 2), and Tsimane’ horticulturalists (n = …

Political Ideology, Emotion Response, And Confirmation Bias, David L. Dickinson

ESI Publications

Motivated reasoning can serve to help resolve emotional discomfort, which suggests emotion as a likely moderator of such reasoning. This paper addresses a gap in the literature by examining emotion and confirmation bias in the political domain. Results from two preregistered studies, which involved over 900 unique participants, document a confirmation bias across distinct dimensions of belief and preference formation. Also, ideologically dissonant information significantly worsens self-reported emotion. With some exceptions, the evidence generally supports the hypothesis that negative emotion moderates the strength of the bias, which highlights the importance of emotion response in understanding and potentially counteracting confirmation bias.

Adam Smith, Human Betterment, And His Erroneous Indentification With Self-Interested Human Action, Vernon L. Smith

ESI Publications

In this essay I discuss the proposition that Adam Smith has been widely misinterpreted as asserting in his second book, The Wealth of Nations, that emergent modern economies are driven by the strictly selfish motives of their human inhabitants. The propositions articulated in his first book, The Theory of Moral Sentiments, which offered a theory of society, extended seamlessly into his second book, and continued to be part of his theory of economy. In both works, he distinguished the universal state of being self-interested from actions taken in one's self-interest, and modeled people as creating and following rules of propriety …

Axiomatic Characterization Of Generalized Neo-Eu Preferences And The Falsifiability Of Ambiguity Theories, Manuel Nunez, Mark Schneider

ESI Working Papers

We introduce a new weakening of the independence axiom, co-extreme independence, which we show characterizes a class that encompasses popular ambiguity models including Hurwicz preferences, ϵ-contamination preferences, and NEOEU preferences. Importantly, our representation unifies these as forms of simple ambiguity models as we show that the Vapnik-Chervonenkis (VC) dimension of these models is either unity or increases linearly with the number of states. In contrast, standard ambiguity models characterized in the Anscombe-Aumann framework are complex ambiguity models that have a VC dimension that is either infinite or increases exponentially in the number of states. We show that simple ambiguity preferences …

A Critical Evaluation Of Loss Aversion As The Determinate Of Effort In Compensation Framing, Timothy W. Shields, James Wilhelm

ESI Working Papers

A robust finding in managerial accounting research is that participants prefer contracts framed as bonuses to economically equivalent contracts framed as penalties. Another finding is that participants put forth more effort when facing penalty contracts than equivalent bonus contracts. Both results are commonly described as due to loss aversion, an integral portion of prospect theory. We test whether loss aversion is correlated with higher effort in an experiment with two parts. In the first part, we elicit individual participants' loss aversion using two measures. In the second part of the experiment, participants choose costly effort to increase the likelihood of …

On Explaining Why The (Human) World Is Rich, Bart J. Wilson

ESI Working Papers

The wealth of the modern world is a natural historical marvel. Explaining it has traditionally been the purview of economic historians, as exemplified by the recent book How the World Became Rich by Mark Koyama and Jared Rubin. Economic historians, though, tend to only ask process-oriented “how” questions and “by what means” questions of the Great Enrichment. The eight co-authors of Explaining Technology, who are not economic historians, engage the debate asking a different question. Their goal is to explain the exponential shape of our enrichment with a model of the combinatorial evolution of technology. With an eye toward how …

Gambling Habits And Probability Judgements In A Bayesian Task Environment, David L. Dickinson, Parker Reid

ESI Publications

Little is known about how gamblers form probability assessments. This paper reports on a preregistered study that administered an incentivized Bayesian choice task to n = 465 self-reported gamblers and non-gamblers. The task elicits subjective probability assessments and allows one to estimate the degree to which distinct information sources are weighted in forming probability assessments. Our data failed to support our main hypotheses that experienced online gamblers would be more accurate than non-gamblers in estimating probabilities, that gamblers experienced in games of skill (e.g., poker) would be more accurate than gamblers experienced only in non-skill games (e.g., slots), that accuracy …

Do Participation Rates Vary With Participation Payments In Laboratory Experiments?, Huizhen Zhong, Cary Deck, Daniel J. Henderson

ESI Working Papers

This paper reports a series of experiments designed to evaluate how the advertised participation payment impacts participation rates in laboratory experiments. Our initial goal was to generate variation in the participation rate as a means to control for selection bias when evaluating treatment effects in common laboratory experiments. Initially, we varied the advertised participation payment to 1734 people from $5 to $15 using standard email recruitment procedures, but found no statistical evidence this impacted the participation rate. A second study increased the advertised payment up to $100. Here, we find marginally significant statistical evidence that the advertised participation payment affects …

Coordination Within And Across Two Cultures, Gabriele Camera, James Gilmore, Marilyn Giselle Hazlett, Jason Shachat, Bochen Zhu

ESI Working Papers

We study within- and cross-culture interaction in a Stag Hunt game, using a controlled online experiment with Chinese and American participants. We find that cross-culture interactions can have a positive impact on efficiency. American participants, particularly females, more frequently selected the efficient but risky action when facing a Chinese counterpart. Chinese male participants, instead, less frequently selected the efficient but risky action when facing an American counterpart. These behavioral asymmetries do not support the notion of cultural equivalence, nor the hypothesis that multiculturalism fosters strategic uncertainty.

Who Helps Tsimane Children And Adults?, Eric Schniter, Daniel K. Cummings, Paul L. Hooper, Jonathan Stieglitz, Benjamin C. Trumble, Hillard S. Kaplan, Michael D. Gurven

ESI Working Papers

We examine various forms of helping behavior among Tsimane Amerindians of Bolivia, focusing on the provision of shelter, childcare, food, sickcare, cultural influence, and traditional story knowledge. Kin selection theory traditionally explains nepotistic nurturing of youth by closely related kin. However, less attention has been given to understanding the help provided by individuals without close genetic relatedness. To explain who provides various forms of help, we evaluate support for several predictions derived from kin selection theory. Our results show that helpers who are most often closely related and from an older generation tend to provide more costly forms of help …

Ideology And Economic Change, Jared Rubin, Debin Ma

ESI Working Papers

This paper revisits the old theses of the contrasting paths to modernization between Japan and China. It develops a new analytical framework regarding the role of ideology and ideological change—Meiji Japan’s decisive turn towards the West pitted against Qing China’s lethargic response to Western imperialism—as the key driver behind these contrasting paths. Our framework and historical narrative highlight the contrast between Tokugawa Japan’s feudal, decentralized political regime and Qing China’s centralized bureaucratic system as a key determinant driving the differential patterns of ideological realignment. We argue that the 1894-95 Japanese naval victory over China could not be justified under the …

Moral Content Diminishes Preference Falsification, Maxine Bonneau, Tanya O'Garra, Praveen Kujal

ESI Working Papers

We examine how the moral (or neutral) content of an issue influences the tendency to falsify attitudes, given varying social and monetary incentives to engage in such ‘preference falsification’. We conduct an incentivized two stage online experimental study where, in a prior first stage, attitude strength over moral and neutral issues is elicited. Then, in the second stage participants in groups of ten were asked to express their preferences regarding the moral or neutral issues for each possible combination of supporters and opposers in their group, each associated with varying monetary payoffs. More than half of the participants falsify their …

On The Stability Of Norms And Norm-Following Propensity: A Cross-Cultural Panel Study With Adolescents, Erik O. Kimbrough, Erin L. Krupka, Rajnish Kumar, Jennifer M. Murray, Abhijit Ramalingam, Sharon Sánchez‑Franco, Olga L. Sarmiento, Frank Kee, Ruth F. Hunter

Economics Faculty Articles and Research

Norm-based accounts of social behavior in economics typically reflect tradeoffs between maximization of own consumption utility and conformity to social norms. Theories of norm-following tend to assume that there exists a single, stable, commonly known injunctive social norm for a given choice setting and that each person has a stable propensity to follow social norms. We collect panel data on 1468 participants aged 11–15 years in Belfast, Northern Ireland and Bogotá, Colombia in which we measure norms for the dictator game and norm-following propensity twice at 10 weeks apart. We test these basic assumptions and find that norm-following propensity is …

Match Stability With A Costly And Flexible Number Of Positions, James Gilmore

Behavioral and Computational Economics (MS) Theses

One of the objectives of two-sided matching mechanisms is to pair two groups of agents such that there is no incentive for pair deviation. The outcome of a match can significantly impact participants. While much of the existing research in this field addresses the matching with fixed quotas, this is not always applicable. We introduce the concept of slot stability, recognizing the potential motivation for organizations to modify their quotas after the match. We propose an algorithm designed to create stable and slot stable matches by employing flexible, endogenous quotas to address this issue.

The Lottery Colonel Blotto Game With Draws, Jingzhi Liu

Behavioral and Computational Economics (MS) Theses

This study presents a novel exploration of the lottery Colonel Blotto game. This adaptation introduces the possibility of draws or ties, moving beyond the traditional winner-take-all framework. The inclusion of the possibility of a draw allows for a more realistic depiction of contests where players may arbitrarily split the value of a battlefield in the absence of a decisive victory. Our model is characterized by the number of battlefields, battlefield values that may vary across battlefields, but are symmetric across players, the distinct player shares of each battlefield value captured in the event of a draw, the potentially asymmetric budgets …

Increases In Regional Brain Volume Across Two Native South American Male Populations, Nikhil N. Chaudhari, Phoebe E. Imms, Nathan F. Chowdhury, Margaret Gatz, Benjamin Trumble, Wendy J. Mack, E. Meng Law, M. Linda Sutherland, James D. Sutherland, Christopher J. Rowan, L. Samuel Wann, Adel H. Allam, Randall C. Thompson, David E. Michalik, Michael I. Miyamoto, Guido Lombardi, Daniel Cummings, Edmond Seabright, Sarah Alami, Angela R. Garcia, Daniel E. Rodriguez, Raul Quispe Gutierrez, Adrian J. Copajira, Paul L. Hooper, Kenneth Buetow, Jonathan Stieglitz, Michael D. Gurven, Gregory S. Thomas, Hillard Kaplan, Caleb E. Finch, Andrei Irimia

ESI Publications

Industrialized environments, despite benefits such as higher levels of formal education and lower rates of infections, can also have pernicious impacts upon brain atrophy. Partly for this reason, comparing age-related brain volume trajectories between industrialized and non-industrialized populations can help to suggest lifestyle correlates of brain health. The Tsimane, indigenous to the Bolivian Amazon, derive their subsistence from foraging and horticulture and are physically active. The Moseten, a mixed-ethnicity farming population, are physically active but less than the Tsimane. Within both populations (N = 1024; age range = 46–83), we calculated regional brain volumes from computed tomography and compared …

Cooperation In Temporary Partnerships, Gabriele Camera, Alessandro Gioffré

ESI Working Papers

The literature on cooperation in infinitely repeated Prisoner’s Dilemmas covers the extreme opposites of the matching spectrum: partners, a player’s opponent never changes, and strangers, a player’s opponent randomly changes in every period. Here, we extend the analysis to settings where the opponent changes, but not in every period. In these temporary partnerships, players can deter some deviations by directly sanctioning their partner. Hence, relaxing the extreme assumption of one-period matchings can support some cooperation also off equilibrium because a class of strategies emerges that are less extreme than the typical “grim” strategy. We establish conditions supporting full …

Truth By Consensus: A Theoretical And Empirical Investigation, Gabriele Camera, Rod Garratt, Cyril Monnet

ESI Working Papers

Truthful reporting about publicly observed events cannot be guaranteed by a consensus process. This fact, which we establish theoretically and verify empirically, holds true even if some individuals are compelled to tell the truth, regardless of economic incentives. In an experiment, subjects routinely misreported a commonly known event when they could monetarily gain from it. Relying on majority consensus did not help uncover the truth, especially if complying with the majority granted small personal monetary gains. This highlights the difficulties in relying on shared consensus protocols to agree on specific events, and the importance of institutions with trusted, impartial observers.

Cross-Cousin Marriage Among Tsimane Forager–Horticulturalists During Demographic Transition And Market Integration, Arianna Dalzero, Bret A. Beheim, Hillard Kaplan, Jonathan Stieglitz, Paul L. Hooper, Cody T. Ross, Michael D. Gurven, Dieter Lukas

ESI Publications

Although still prevalent in many human societies, the practice of cousin marriage has precipitously declined in populations undergoing rapid demographic and socioeconomic change. However, it is still unclear whether changes in the structure of the marriage pool or changes in the fitness-relevant consequences of cousin marriage more strongly influence the frequency of cousin marriage. Here, we use genealogical data collected by the Tsimane Health and Life History Project to show that there is a small but measurable decline in the frequency of first cross-cousin marriage since the mid-twentieth century. Such changes are linked to concomitant changes in the pool of …

Who Do You Think Is The Greatest-Ever Economist?, Mark Skousen

Business Faculty Articles and Research

"Deciding who is the Greatest of All Time (GOAT) is a popular debate in sports. Is it Michael Jordan in basketball? Lionel Messi in fútbol? Muhammed Ali in boxing? Babe Ruth in baseball? (In case you are wondering, the answer is 'yes' in each category.)

Tyler Cowen, professor at George Mason University and co-publisher of the popular Marginal Revolution website, has come up with one of the most clever, entertaining ways to write a history of economic thought by selecting his favorite GOAT in economics."

Ambiguity, Cognitive Reflection, And Strategic Complexity Across Auctions, Cary Deck, Paan Jindapon, Tigran Melkonyan, Mark Schneider

ESI Working Papers

This paper bridges large but separate literatures on decision-making under ambiguity, the dual system framework of behavioral economics, and market design. We characterize behavior under ambiguity arising from dual system preferences. Rational System 2 satisfies the subjective expected utility axioms while behavioral System 1 satisfies the obvious dominance axiom from mechanism design. Our axioms provide a novel foundation for the popular NEO-EU ambiguity model and allow for source dependent ambiguity perceptions. Our approach also provides an explanation as to how behavioral differences arise between obviously strategy-proof mechanisms (e.g. English auctions) and other mechanisms. Empirically, we find ambiguity perceptions are lower …

Cognitive Abilities And Individual Earnings In Hybrid Continuous Double Auctions, Yan Peng, Jason Shachat, Lijia Wei, S. Sarah Zhang

ESI Working Papers

There is growing evidence that human cognitive abilities strongly influence individual trader financial performance. Much of this evidence has been established in experimental asset markets whose participants are exclusively human traders. However, algorithmic trading has reshaped financial markets, raising the issue of whether these assessments on the impact of cognititive abilities still hold in these settings, particularly in markets with low latency algorithmic traders. Extending previous findings in experimental asset markets, we examine how individual cognitive abilities—reaction time, trader intuition (Theory of Mind), and cognitive reflection—affect human earnings in induced demand and supply markets with and without algorithmic traders of …

Coordinated And Uncoordinated Punishment In A Team Investment Game, Vicente Calabuig, Natalia Jiménez-Jiménez, Gonzalo Olcina, Ismael Rodriguez-Lara

ESI Publications

Coordinated punishment occurs when punishment requires a specific number of punishers to be effective, otherwise, no damage will be inflicted on the target. While societies often rely on this punishment device, its benefits are unclear compared to uncoordinated punishment, where punishment decisions are substitutes. In this paper, we compare the efficacy of coordinated and uncoordinated punishment in a team investment game with two investors and one allocator. Our findings indicate that coordinated punishment results in higher levels of cooperation and reciprocity, as measured by the levels of joint investment and the return by allocators. Importantly, this does not translate into …

Possible Role Of The One-Half Heuristic In Overconfidence Research, Vojtěch Zíka

ESI Working Papers

Overconfidence research often involves estimating performance within a fixed range. Recent studies suggest that overprecision is affected by central tendency bias, the tendency to estimate near the center of a perceived distribution. This paper examines whether a similar pattern influences the other two overconfidence types, overestimation and overplacement. In a laboratory experiment (N = 120), participants estimated their own and the average performance over five rounds of ten Rock–Paper–Scissors games. Each round earned for up to 40 points, but average performance varied across three treatments, with means of 16.6, 20, and 23.3 points. The main question was whether this manipulation …

How Does Passive Investing Effect The Informational Efficiency Of Prices?, Brice Corgnet, Mark Desantis, Yan Peng, David Porter, Jason Shachat

ESI Working Papers

We investigate the causal effects of passive investing on informational efficiency and market quality metrics by developing a novel laboratory experiment that introduces Index trackers with exogenous passive investment flows. We find that, while improving liquidity, Index tracking hurts informational efficiency, confirming our main hypothesis. Furthermore, we observe violations of the law of one price, leading to widespread and persistent arbitrage opportunities. Additionally, our research uncovers that Active traders, particularly those with private information about asset values and high cognitive ability, reap benefits from the introduction of Index tracking.

Sleep Restriction Alters The Integration Of Multiple Information Sources In Probabilistic Decision-Making, Jeryl Y. L. Lim, Johanna M. Boardman, Clare Anderson, David L. Dickinson, Daniel Bennett, Sean P. A. Drummond

ESI Publications

The detrimental effects of sleep loss on overall decision-making have been well described. Due to the complex nature of decisions, there remains a need for studies to identify specific mechanisms of decision-making vulnerable to sleep loss. Bayesian perspectives of decision-making posit judgement formation during decision-making occurs via a process of integrating knowledge gleaned from past experiences (priors) with new information from current observations (likelihoods). We investigated the effects of sleep loss on the ability to integrate multiple sources of information during decision-making by reporting results from two experiments: the first implementing both sleep restriction (SR) and …

Representation And Bracketing In Repeated Games, Mouli Modak

ESI Working Papers

In this experimental paper, the author investigates the framing effect of different representations of multiple strategic settings or games on a player’s strategic behavior. Two representations of the same environment are employed, wherein a player engages in two infinitely repeated prisoner’s dilemma games. In the first representation (termed Split), the stage games are shown separately. In contrast, the second representation (termed Linked) displays a combined stage game. The choice bracketing, distinguishing between Narrow and Broad bracketing, is considered a potential cause behind any disparity in behavior between the two representations. The Split representation does not necessitate broad bracketing, whereas the …

Poor Oral Health Is Associated With Inflammation, Aortic Valve Calcification, And Brain Volume Among Forager-Farmers, Benjamin C. Trumble, Matthew Schwartz, Andrew T. Ozga, Gary T. Schwartz, Christopher M. Stojanowski, Carrie L. Jenkins, Thomas Kraft, Angela R. Garcia, Daniel K. Cummings, Paul L. Hooper, Daniel Eid Rodriguez, Kenneth Buetow, Bret Beheim, Andrei Irimia, Gregory S. Thomas, Randall C. Thompson, Horus Team, Margaret Gatz, Jonathan Stieglitz, Caleb E. Finch, Michael Gurven, Hillard Kaplan

ESI Publications

Poor oral health is associated with cardiovascular disease and dementia. Potential pathways include sepsis from oral bacteria, systemic inflammation, and nutritional deficiencies. However, in post-industrialized populations, links between oral health and chronic disease may be confounded because the lower socioeconomic exposome (poor diet, pollution, low physical activity) often entails insufficient dental care. We assessed tooth loss, caries, and damaged teeth, in relation to cardiovascular and brain aging among the Tsimane, a subsistence population living a relatively traditional forager-horticulturalist lifestyle with poor dental health, but minimal cardiovascular disease and dementia. Dental health was assessed by a physician in 739 participants aged …

How Personalized Networks Can Limit Free Riding: A Multi-Group Version Of The Public Goods Game, Aaron S. Berman, Laurence R. Iannaccone, Mouli Modak

ESI Working Papers

People belong to many different groups, and few belong to the same network of groups. Moreover, people routinely reduce their involvement in dysfunctional groups while increasing involvement in those they find more attractive. The net effect can be an increase in overall cooperation and the partial isolation of free-riders, even if free-riders are never punished, excluded, or recognized. We formalize and test this conjecture with an agent-based social simulation and a multi-good extension of the standard repeated public goods game. Our initial results from three treatments suggest that the multi-group setting indeed raises overall cooperation and dampens the impact of …