Deception and Reception: The Behavior of Information Providers and Users (original) (raw)

Information asymmetry and deception in the investment game

RePEc: Research Papers in Economics, 2012

Several situations in our daily interactions are characterized by uncertainty and asymmetric information regarding the final outcomes. For example, an investor may overstate a project's value, or a superior may choose to under, or over, state the gains from a project to a subordinate. We modify the standard investment game to study the effect of possible deception, i.e. over-, or understatement nt of the true value, on investee (and investor) behavior. We find that deception is prevalent and around 66% of the investors send false messages. Investors both over-, and under-, state the true value of the multiplier, k. We elicit investee beliefs and find that investees are naive in that almost half of them believe the message they receive. Meanwhile, a large proportion of investors think that sending a message was useful. The introduction of the possibility of deception does not affect trust or trustworthiness on average, but deceivers make the deceived worse off, return less and are more likely to report lying to avoid harming others. Finally, an increase in information asymmetry increases deception. 1 The authors would like to thank Ignacio Ballesteros for his help with setting up the software and Georgi Kocharov, Alvaro Martín and David Andrés Cerezo for help with running the experiments. Kujal, Hernán, and Clots-Figueras, acknowledge support from grants 2009/00055/001, 2012/00103/001, and 2007/04339/001, respectively, from the Spanish Ministry of Education. The authors would like to thank seminar participants at Jaume I, Castellon, participants at SEET-2011 and the Rady Deception, Incentives and Behavior Symposium. Antonio Cabrales and Brice Corgnet provided several useful suggestions.

Asymmetry and Deception in the Investment Game

RePEc: Research Papers in Economics, 2012

Self-deception and deception in capital markets

2005

Abstract We argue that self-deception underlies various aspects of the behavior of investors and of prices in capital markets. We examine the implications of self-deception for investor overconfidence, and how firms and financial institutions can exploit the overconfidence of investors in a predatory fashion. These ideas link self-deception to deception by others. We also examine how investor self-deception and overconfidence can affect financial reporting and disclosure policy.

Do Investors Trust or Simply Gamble

2010

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.

Organized illusions: A behavioral theory of why corporations mislead stock market investors (and cause other social harms)

University of Pennsylvania Law Review, 1997

Rationality is a strong assumption in the legal literature about how corporations and other organizations behave in market settings. The modem transaction-cost economics on which most contemporary corporate scholarship is based' concedes that the rationality of officers, directors, and other managers is "bounded" (that is, that they do not have perfect information or unlimited time, skill, and attention) and acknowledges that these agents have self-interests that differ from those of their firms' owners. Because of these limits and the impert Lee S. & Charles A. Speir Professor, Vanderbilt University School of Law. The author would like to thankjim Cox, Eric Orts, and the many participants at workshops and presentations at Stanford University, the University of Michigan, and the University of Illinois for their very helpful comments. ' This literature is sufficiently pervasive that it hardly needs extensive citation; key legal texts in corporate law include FRANK H. EASTERBROOK & DANIEL R. FISCHEL, THE

Reputation, honesty, and efficiency with insider information: an experiment

Journal of Economics & …, 2000

Previous works on asymmetric information in asset markets tend to focus on the potential gains in the asset market itself. We focus on the market for information and conduct an experimental study to explore, in a game of finite but uncertain duration, whether reputation can be an effective constraint on deliberate misinformation. At the beginning of each period, an uninformed potential asset buyer can purchase information, at a fixed price and from a fully-informed source, about the value of the asset in that period. The informational insiders cannot purchase the asset and are given short-term incentives to provide false information when the asset value is low. Our model predicts that, in accordance with the Folk Theorem, Pareto-superior outcomes featuring truthful revelation should be sustainable.

The costs of deception: Evidence from psychology

Experimental Economics, 2002

Recently, it has been argued that the evidence in social science research suggests that deceiving participants in an experiment does not lead to a significant loss of experimental control. Based on this assessment, experimental economists were counseled to lift their de facto prohibition against deception to capture its potential benefits. To the extent that this recommendation is derived from empirical studies, we argue that it draws on a selective sample of the available evidence. Building on a systematic review of relevant research in psychology, we present two major results: First, the evidence suggests that the experience of having been deceived generates suspicion that in turn is likely to affect the judgment and decision making of a non-negligible number of participants. Second, we find little evidence for the reputational spillover effects that have been hypothesized by a number of authors in psychology and economics (e.g., Kelman, H.C., 1967. Psychological Bulletin. 67, 1-11; Davis, D.D. and Holt, C.A., 1993. Experimental Economics. Princeton University Press, Princeton). Based on a discussion of the methodological costs and benefits of deception, we conclude that experimental economists' prohibition of deception is a sensible convention that economists should not abandon.

REPUTATION AND HONESTY IN A MARKET FOR INFORMATION

SSRN Electronic Journal, 1998

Do Nonprofessional Investors React to Fraud Red Flags?

SSRN Electronic Journal, 2000

Investor losses from fraud have become a significant concern for policymakers. We experimentally examine whether nonprofessional investors react to fraud red flags. Prior research has shown that fraud firms exhibit multiple red flags in their 10-Ks prior to the detection of fraud. However, these red flags are not typically transparent to investors in the current financial reporting environment. We find that a transparent presentation of key financial measures and nonfinancial measures (NFMs) that indicates multiple red flags leads to lower investment positions than a presentation of these red flags that is not transparent. This finding is important as it confirms that when multiple fraud red flags are not transparent, investors do not identify that fraud risk is high and continue to invest in firms where losses from fraud are more likely. Additionally, we find that when only a single red flag is present (i.e., low fraud risk), a transparent presentation does not affect investment levels.

Deception and Reception: The Behavior of Information Providers and Users (original) (raw)

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