Essays in experimental economics (original) (raw)
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Essays in Behavioral and Experimental Economics
2006
Behavioral economics aims to provide more realistic psychological foundations for economic models. Experimental methods can contribute to this effort by providing the ability to identify causal processes and motivations that can be confounded in field settings. The essays in this dissertation examine three critical issues in behavioral economics using lab and field experiments. The first two essays examine two core elements of economic rationality; expected utility theory and Bayesian updating. The essays consider, respectively, ambiguity, and information cascades, in environments in which limitations of the theories can be studied. The third essay examines a contracting game in which other-regarding preferences are explicitly considered. Decision making under ambiguity has been of interest to economists since the 1920's (Knight (1921), Keynes (1921)). It has received renewed attention due to the work
Market behavior in the presence of costly, imperfect information: Experimental evidence
Journal of Economic Behavior & Organization, 1997
We investigate the effects of imperfect, private information on prices in an experimental asset market. We compare Bayesian predictions with market prices, examine information dissemination, and consider the value of imperfect information. We find some evidence that market prices are consistent with Bayes' rule. We also find that non-Bayesian prices are more likely to arise as the degree of uncertainty associated with private information increases. Imperfect information is disseminated in our experimental markets and traders perceive that imperfect information has value.
Buyer confusion and market prices
International Journal of Industrial Organization, 2011
We employ a price setting duopoly experiment to examine whether buyer confusion increases market prices. Each seller o¤ers a good to buyers who have homogeneous preferences. Sellers decide on the number of attributes of their good and set prices. The number of attributes bears no cost to the sellers and does not a¤ect the value of the good to the buyers but adds complexity to buyers'evaluation of the goods. The experimental results indicate that the buyers make more suboptimal choices and that prices are higher when the number of attributes of the goods is higher. Moreover, prices and pro…ts are higher than those in a benchmark treatment with perfectly rational (robot) buyers.
We repeatedly elicited individuals' Willingness to Accept (WTA) evaluations for an auctioned bad in an experimental setting in which truthful revelation is the (weakly) dominant strategy. We investi-gate whether the observation of supposedly irrelevant signals (the market price, the asks at either the bottom or the top of the distribution of asks) affect the elicited values. Our experimental sample was made up of 162 subjects partitioned in 18 independent markets characterized by different informa-tional conditions. Our analysis provide two main findings. First, individuals' WTA evaluations are remarkably driven by a strong although unexpected tendency to conform to the asks either at the bottom or the top of the distribution by a factor of 44-66%. Second, although a clear tendency to adapt one's own ask to the market price (shaping effect) emerges when no other information is being provided, the provision of information about the actual behavior of well identified (grou...
Costly Buyer Search in Laboratory Markets with Seller Advertising*
The Journal of Industrial Economics, 2000
In this experiment, sellers simultaneously choose prices and advertising strategies. Buyers either purchase at an advertised price or search sequentially for other prices. In the unique symmetric equilibrium, sellers charge a high unadvertised price or advertise a price chosen from a lower interval. Increases in search or advertising costs raise equilibrium prices and affect equilibrium advertising intensity. Empirical results are consistent with most comparative static predictions. Sellers, however, price much lower and advertise more intensely than predicted. Consequently, market outcomes more closely resemble a perfect information, Bertrand-like equilibrium than the imperfect information, mixed strategy equilibrium with significant seller market power.
Price discovery with fallible choice
2018
General equilibrium theory can state conditions for the existence, uniqueness and optimality of the Walrasian equilibrium. However, it cannot satisfactorily explain how this equilibrium comes about. Experimental economists, on the other hand, claim that it takes a few uninformed traders and a Continuous Double Auction to achieve results that closely resemble the Walrasian equilibrium. This suggests that we can learn something profound about price discovery from experimental trading. This thesis seeks behavioral explanations of price formation, which acknowledge that the economy is out of equilibrium and that human choice is fallible. It analyzes experimental trading in the Scarf examples by means of simulation techniques. Among other things, it finds that rules of thumb better explain human trading behavior than do monopolistic competition, prospect theory or entropy-sensitive preferences. This thesis also proposes a new price adjustment process in which an auctioneer assumes that a...
Two essays on experimental economics
2020
This thesis uses the Prospect Theory framework to contribute in two open questions: (i) Does the hot hand belief endogenously affect individual portfolio selection?, and (ii) Is there a limit to the effect of aggregation on Myopic Loss Aversion (MLA)? We ran lab experiments with undergraduate students at two Brazilian universities to address these two questions. In the second chapter, we test how the hot hand self-belief affects the individual portfolio selection in the presence of Loss Aversion (LA). Our experimental design used portfolio decisions considering random prices that were obtained from a predefined system so that the hot hand belief was defined as a wrong expectation about the price formation, and estimated considering how the investor evaluated both information about previous prices and investment performances. The portfolio dimension and the risk-return patterns were defined to attenuate confusion about the diversity of the asset price distributions, while the price formation aimed to attenuate familiarity about the development of prices. The results show that the propensity to buy is, in part, positively correlated with the price changes. More frequency of success in the investments made the hot hand show up in data, but the loss-averse investor profile dominated the portfolio management when the participant faced persistent negative price trends, making the hot hand effect fade away. In the third chapter, we got a representative sample for the experimental design proposed by Schoti (2012) in order to evaluate investors facing the frequency of feedback and the flexibility of choice smaller than what was provided to participants in the study conducted by Gneezy and Potters (1997). Schoti's study proposed a new treatment group in which participants played the rounds under more aggregated conditions to receive extremely low frequency of information, further limiting MLA. Our results support Schoti's hypothesis showing that MLA is positively related to the information frequency and the flexibility of choice, but also that the effect of these variables on the myopia is decreasing. Participants in our experiment exhibited less risk aversion and bet more significant amounts when they faced more limited feedback and choices. However, doubling the feedback and choice restrictions did not produce twice less myopia, suggesting that the effect is not linear.
J Ind Econ, 2010
In this experiment, sellers simultaneously choose prices and advertising strategies. Buyers either purchase at an advertised price or search sequentially for other prices. In the unique symmetric equilibrium, sellers charge a high unadvertised price or advertise a price chosen from a lower interval. Increases in search or advertising costs raise equilibrium prices and affect equilibrium advertising intensity. Empirical results are consistent with most comparative static predictions. Sellers, however, price much lower and advertise more intensely than predicted. Consequently, market outcomes more closely resemble a perfect information, Bertrand-like equilibrium than the imperfect information, mixed strategy equilibrium with significant seller market power.
Experiments on strategic choices and markets
Marketing Letters, 2008
Much of experimental research in marketing has focused on individual choices. Yet in many contexts, the outcomes of one's choices depend on the choices of others. Furthermore, the results obtained in individual decision making context may not be applicable to these strategic choices. In this paper, we discuss three avenues for further advancing our understanding of strategic choices. First, there is a need to develop theories about how people learn to play strategic games. Second, there is an opportunity to enrich standard economic models of strategic behavior by allowing for different types of bounded rationality and by relaxing assumptions about utility formulation. These new models can help us to more accurately predict strategic choices. Finally, future research can improve marketing practice by designing better mechanisms and validating them using experiments.