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

We investigated the behavior of information providers (underwriters) and users (investors) in a controlled laboratory experiment where underwriters had incentives to deceive and investors had incentives to avoid deception. The results of our experiment showed that there was a significant proportion of both deceptive and non-deceptive underwrites. Despite the presence of deceptive underwriters, investors were receptive to underwriters' reports, gleaning information content, albeit overly optimistic. Within our sample, deception by underwrites and reception by investors were payoff maximizing strategies. Moreover, participants exhibiting behavior free from projection bias (in that they sent deceptive reports to investors but at the same time were receptive to reports of underwriters) earned the highest payoffs. These results call into question the characterization of duped investors being irrational.