fixing exchange rates a virtual quest for fundamentals abstract fixed exchange rates are less volatile than floating rates but the volatility of macroeconomic variables such as money and output does not change very much across exchange rate regimes this suggests that exchange rate models based only on macroeconomic fundamentals are unlikely to be very successful it also suggests that there is no clear tradeoff between reduced exchange rate volatility and macroeconomic stability

measuring skill and chance in games abstract online and offline gaming has become a multi billion dollar industry yet games of chance in contrast to games of skill are prohibited or tightly regulated in many jurisdictions thus the question whether a game predominantly depends on skill or chance has important legal and regulatory implications in this paper we suggest a new empirical criterion for distinguishing games of skill from games of chance all players are ranked according to a best fit elo algorithm the wider the distribution of player ratings are in a game the more important is the role of skill most importantly we provide a new benchmark 50 chess that allows to decide whether games predominantly depend on chance as this criterion is often used by courts we apply the method to large datasets of various games e g chess poker backgammon our findings indicate that most popular online games including poker are below the threshold of 50 skill and thus depend predominantly on chance in fact poker contains about as much skill as chess when 75 of the chess results are replaced by a coin flip

survival of overconfidence in currency markets this paper tests the influential hypothesis that irrational traders will be driven out of financial markets by trading losses the paper s main finding is that overconfident currency dealers are not driven out of the market dealers with extensive experience are neither more nor less overconfident than their junior colleagues we set the stage for this investigation by providing evidence that currency dealers display two forms of overconfidence they underestimate uncertainty and they overestimate their professional success this is notable because one might have expected the opposite currency dealers face strong incentives for accuracy they have access to comprehensive information and they have extensive experience

centralized versus decentralized provision of local public goods a political economy approach abstract this paper takes a fresh look at the trade off between centralized and decentralized provision of local public goods it argues that the sharing of the costs of local public spending in a centralized system will create a conflict of interest between citizens in different jurisdictions when spending decisions are made by a legislature of locally elected representatives this conflict of interest will play out in the legislature depending on precisely how the legislature behaves the result may be excessive public spending or allocations of public goods characterized by uncertainty and misallocation across districts the extent of the conflict of interest between districts is affected by spillovers and differences in tastes for public spending thus the relative performance of centralized and decentralized systems depends upon spillovers and differences in tastes for public spending but for different reasons than suggested in the existing literature

boys will still be boys gender differences in trading activity are not due to differences in over confidence abstract the fact that men trade more than women in financial markets has been attributed to men s overconfidence however evidence supporting this view is only indirect we directly test this conjecture experimentally by measuring confidence using monetary incentives before participants trade in a simulated market we find that men are more confident than women in our trading task men also trade more and they hold larger and less diversified portfolios than women however we do not find that differences in confidence explain any portion of the gender gap in trading activity we explore alternative candidate channels such as risk aversion financial literacy or competitiveness but find that these factors are also unlikely to play a role

an economic model of representative democracy this paper develops an approach to the study of democratic policy making where politicians are selected by the people from those citizens who present themselves as candidates for public office the approach has a number of attractive features first it is a conceptualization of a pure form of representative democracy in which government is by as well as of the people second the model is analytically tractable being able to handle multidimensional issue and policy spaces very naturally third it provides a vehicle for answering normative questions about the performance of representative democracy

investor overconfidence and the forward premium puzzle we offer an explanation for the forward premium puzzle in foreign exchange markets based upon investor overconfidence in the model overconfident individuals overreact to their information about future inflation which causes greater overshooting in the forward rate than in the spot rate thus when agents observe a signal of higher future inflation the consequent rise in the forward premium predicts a subsequent downward correction of the spot rate the model can explain the magnitude of the forward premium bias and several other stylized facts related to the joint behaviour of forward and spot exchange rates our approach is also consistent with the availability of profitable carry trade strategies

trading mechanisms and stock returns an empirical investigation this paper examines the effects of the mechanism by which securities are traded on their price behavior we compare the behavior of open to open and close to close returns on nyse stocks given the differences in execution methods applied in the opening and closing transactions opening returns are found to exhibit greater dispersion greater deviations from normality and a more negative and significant autocorrelation pattern than closing returns we study the effects of the bid ask spread and the price adjustment process on the estimated return variances and covariances and discuss the associated biases we conclude that the trading mechanism has a significant effect on stock price behavior

overconfidence and social signalling evidence from both psychology and economics indicates that individuals give statements that appear to overestimate their ability compared to that of others we test three theories that predict such relative overconfidence the first theory argues that overconfidence can be generated by bayesian updating from a common prior and truthful statements if individuals do not know their true type the second theory suggests that self image concerns asymmetrically affect the choice to receive new information about one s abilities and this asymmetry can produce overconfidence the third theory is that overconfidence is induced by the desire to send positive signals to others about one s own skill this suggests either a bias in judgement strategic lying or both we formulate this theory precisely using a large data set of relative ability judgements about two cognitive tests we reject the restrictions imposed by the bayesian model and also reject a key prediction of the self image models that individuals with optimistic beliefs will be less likely to search for further information about their skill because this information might shatter their self image we provide evidence that personality traits strongly affect relative ability judgements in a pattern that is consistent with the third theory of social signalling our results together suggest that overconfidence in statements is more likely to be induced by social concerns than by either of the other two factors copyright 2013 oxford university press

unemployment and inflation consequences of unexpected election results the empirical evidence toward rational partisan theory of business cycles is mixed and thus inconclusive this is due to the enormous heterogeneity of the existing empirical studies only a few of these test explicitly for the central theoretical innovation that post electoral blips in economic activity depend on the degree of the electoral surprise using polling data we present empirical evidence in favor of rational partisan theory for a panel of oecd countries

progress in behavioral game theory i s game theory meant to describe actual choices by people and institutions or not it is remarkable how much game theory has been done while largely ignoring this question the seminal book by von neumann and morgenstern the theory of games and economic behavior was clearly about how rational players would play against others they knew were rational in more recent work game theorists are not always explicit about what they aim to describe or advise at one extreme highly mathematical analyses have proposed rationality requirements that people and firms are probably not smart enough to satisfy in everyday decisions at the other extreme adaptive and evolutionary approaches use very simple modelsmostly developed to describe nonhuman animals in which players may not realize they are playing a game at all when game theory does aim to describe behavior it often proceeds with a disturbingly low ratio of careful observation to theorizing this paper describes an approach called behavioral game theory which aims to describe actual behavior is driven by empirical observation mostly experiments and charts a middle course between over rational equilibrium analyses and under rational adaptive analyses the recipe for behavioral game theory i will describe has three steps start with a game or naturally occurring situation in which standard game theory makes a bold prediction based on one or two crucial principles if behavior differs from interested readers familiar with game theory should read crawford 1997 whose approach is more eclectic than mine he concludes p 236 that most strategic behavior can be understood via a synthesis that combines elements from each of the leading theoretical frameworks traditional game theory evolutionary game theory and adaptive learning with a modicum of empirical information about behavior behavioral game theory adds psychological interpretations to this synthesis

an empirical evaluation of the overconfidence hypothesis abstract recently several behavioral finance models based on the overconfidence hypothesis have been proposed to explain anomalous findings including a short term continuation momentum and a long term reversal in stock returns we characterize the overconfidence hypothesis by the following four testable implications first if investors are overconfident they overreact to private information and underreact to public information second market gains make overconfident investors trade more aggressively in subsequent periods third excessive trading of overconfident investors in securities markets contributes to the observed excessive volatility fourth overconfident investors underestimate risk and trade more in riskier securities to document the presence of overconfidence in financial markets we empirically evaluate these four hypotheses using aggregate data overall we find empirical evidence in support of the four hypotheses

risk aversion and incentive effects new data without order effects holt and laury 2002 used a menu of ordered lottery choices to make inferences about risk aversion under various payment conditions the main results of that paper were a subjects are risk averse even for relatively small payments of less than 5 b risk aversion increases sharply with large increases in the scale of cash payoffs and c there is no significant effect from increasing the scale of hypothetical payment with a few exceptions noted in the paper all treatments began with a low payment choice followed by a choice with hypothetical payments that had been scaled up by 20 50 or 90 followed by a real cash decision with the same high payment scale 20 50 or 90 followed by a single final low 1 real payment choice those in the 90 treatment could earn amounts ranging from 9 00 to 346 50 in this task as glenn w harrison et al 2004 correctly note this design confounds order and treatment effects since the high real payment choice was always completed after the low real and high hypothetical payment tasks in a new experiment reported below we first seek to replicate harrison et al s finding that the order effect participating in a low payment choice before making a high payment choice magnifies the scale effect in a second treatment each subject completes the menu of lottery choices under just one payment condition 1 or 20 real or hypothetical thereby eliminating any order effects i new data

overconfidence as a social bias experimental evidence abstract the overconfidence bias is discussed extensively in economic studies yet fails to hold experimentally once monetary incentives and feedback are implemented we consider overconfidence as a social bias for a simple real effort task we show that individually economic conditions effectively prevent overconfidence by contrast the introduction of a very basic purely observational social setting fosters overconfident self assessments additionally observing others actions effectively eliminates underconfidence compared to the individual setting

judgmental overconfidence and trading activity abstract we investigate the theoretically proposed link between judgmental overconfidence and trading activity in addition to applying classical measures of miscalibration we introduce a measure to capture misperception of signal reliability which is the relevant bias in the theoretical overconfidence literature we relate the obtained overconfidence measures to trading activity in call and continuous experimental asset markets our results confirm prior findings that classical miscalibration measures are not related to trading activity misperception of signal reliability is positively related to trading volume in the continuous market for one of two treatments in the other one no relation is found except that highly overconfident subjects trade less in addition we find that men trade more than women at high levels of risk aversion but the gender trading gap vanishes as risk aversion lessens the reason is that the trading activity of women seems to be more sensitive to risk attitudes than that of men

wage inflation electoral uncertainty and the exchange rate regime theory and uk evidence the authors extend the rational partisan model of inflation to allow for the effects of unemployment persistence on the dynamics of inflation the authors combine this model with the exchange rate regime model of inflation and examine the experience of the united kingdom outside the fixed exchange rate regime of bretton woods persistently high inflation can be attributed to the failure of political parties to precommit to price stability in the light of unemployment persistence election times are associated with higher inflation with the exception of the thatcher period there is no evidence that the labour party is in general more tolerant to inflation than the conservatives copyright 1992 by royal economic society

electoral uncertainty and the macroeconomy the evidence from canada the partisan advantage and incumbency advantage versions ofthe rational partisan business cycle model are tested bothmodels assume agents form weighted averages of partisaninflation rates during an election period and differ only inhow the weights are formed which alters the form of businesscycles the partisan advantage assumes fixed weightsdesignated for both major parties in each election whereasthe incumbency advantage model assumes fixed weights forwhichever is the incumbent and opposition party in eachelection the symmetric representation assumes each electionis a toss up strongest support is found for a temporarysymmetric effect on the level of output but none of themodels are supported for temporary electoral changes in growthor unemployment rates

decisiveness attitude expression and symbolic responses in contingent valuation surveys abstract despite suggestions that respondents to contingent valuation studies often follow alternate models of individual decision making few theoretical models have been developed the paper presents a theoretical model of symbolic and attitude expressive contingent valuation responses drawing on relevant contributions in psychology and political science it is argued that the highly symbolic and emotional nature of many environmental issues often activates the need for individuals to express their attitudes and values which when coupled with a perceived non decisiveness of individual questionnaire responses can result in value expressive considerations dominating some cvm responses at the expense of the desired outcome appraisal economic tradeoffs the implications for some topical issues in cvm are explored

behavioral uncertainty and the dynamics of traders confidence in their price forecasts by how much does the presence of behavioral uncertainty in an experimental asset market reduce subjects confidence in their price forecasts an incentivized interval forecast elicitation method is employed to answer this question each market consists of six traders and the value of dividends is known two treatments are considered six human traders 6h and one human interacting with five computer traders whose behavior is known 1h5c we find that while the deviation of the initial price forecasts from fundamental value is smaller in the 1h5c treatment than in the 6h treatment albeit not statistically significantly the average confidence regarding the forecasts is not we further analyze the relationships between subjects confidence in their forecasts and their trading behavior as well as their trading performance in the 6h treatment while subjects high confidence in their short term forecasts shows a negative correlation with their trading performance high confidence in their long term forecasts shows a positive correlation with trading performance

using survey data to test standard propositions regarding exchange rate expectations survey data provide a measure of exchange rate expectations superior to the forward rate in that no risk premium interferes we estimate extrapolative adaptive and regressive models of expectations static or random walk expectations and bandwagon expectations are rejected current appreciation generates the expectation of future depreciation because variables other than the contemporaneous spot rate receive weight in comparing expectations to the process governing the spot rate we find statistically significant bias no variable is as ubiquitous in international financial theory and yet as elusive empirically as investors expectations regarding exchange rates in the past expectations have been modeled in an ad hoc way often by using the forward exchange rate there is however a serious problem with using the forward discount as the measure of the expected change in the exchange rate in that the two may not be equal the gap that may separate the forward discount and expected depreciation is generally interpreted as a risk premium most of the large empirical literature testing the unbiasedness of the forward exchange rate for example has found it necessary either arbitrarily to assume away the existence of the risk premium if the aim

political business cycles and macroeconomic credibility a survey there is clear evidence that government popularity and election performance is affected in part by economic performance suggesting that governments may manipulate the economy to political advantage simple models incorporating adaptive expectations which allowed the government to exploit this relationship were developed in the 1970s but fell out of fashion with the advent of new classical economics however modern theories of the political business cycle which are closely related to the macroeconomic policy game literature assume rational expectations and lead to forms of political business cycle driven by the existence of uncertainty of one type or another the international evidence suggests that some aspects of the theories apply although definitive conclusions are as we might expect hard to come by

an expressive voting theory of strikes i introduction economists usually make the realistic assumption that individuals commonly choose to further their material interests other things equal they will choose the higher paying job make the investment with a higher expected return for a given risk and so on recent work however has pointed out that individuals do not always pursue their immediate selfish interests evolutionary pressures for example may promote emotional outbursts which have little immediate benefit social pressures may lead to behavior which is not pareto optimal but which is individually rational in short recent work has shown that behavior which at first looks irrational need not be for further discussion see akerlof 1984 chs 4 and 9 etzioni 1988 frank 1988 simon 1990 this paper considers emotional behavior which cannot be explained by its long term benefits it instead focuses on behavior which is not costly when practiced by one person but is when practiced by many unlike other works i do not require that individuals usually act emotionally or that they do so at significant cost to themselves i only require that when the cost of emotional behavior is sufficiently small individuals will pursue it indeed in my model individuals rationally calculate when to behave emotionally in particular under some circumstances the action of any one individual has negligible effects on his wealth though the similar actions of numerous persons will have significant effects individuals may then free ride letting emotional motives guide their activity this paper presents one important application of such behavior the decision of a union member to vote for a strike indeed it has long been recognized that though union members may vote for strikes to increase wages emotional considerations can also be important in 1921 hansen claimed that strike decisions are motivated primarily by a sense of grievance about wages ashenfelter and johnson 1969 37 write that union leaders may prefer to call a strike because under strike conditions the leadership may at least appear as adversaries against management in a crusade which may even raise their political stock and will unify the workers newspapers tell of strikes that appear to have little economic rationale for example the wall street journal march 17 1989 reported that with the eastern airlines walkout now nearly two weeks old what boils to the surface is an intense highly personal anger a feeling that their self respect honor and dignity have been undercut by a management obsessed with pinching pennies the new york times april 23 1989 reported that four years after the end of a strike against united airlines union pilots were harassing non union pilots the harassment ranged from verbal abuse and refusal to shake hands to more serious breaches like not advising a pilot that he is approaching an altitude assigned by air traffic controllers work by getman goldberg and herman 1976 suggests that a worker in union representation elections is more likely to favor unionization the more effectively the company threatened the loss of jobs following unionization this view of non instrumental union behavior is also consistent with a large body of evidence which finds that union members are less likely to ratify a contract the worse the relations between management and labor indeed cappelli and sterling 1988 find that the state of labor relations in a plant is the strongest predictor of union voting outcomes similarly kaufman and martinez vazquez 1988 find that union members are least likely to vote in favor of wage concessions in plants with adversarial labor relations though much evidence is consistent with the hypothesis that strike votes are not based solely on economic considerations the approach suffers from two faults as a basis for an economic theory first intuition suggests that the emotional gain from a strike is likely to be far smaller than the monetary cost of a strike a strike may cost a worker over 1 000 a week in lost wages 1 yet we rarely find people wasting that much money in emotional outbursts

rational expectations and the aggregation of diverse information in laboratory security markets the idea that markets might aggregate and disseminate information and also resolve conflicts is central to the literature on decentralization hurwicz 1972 and rational expectations lucas 1972 we report on three series of experiments all of which were predicted to have performed identically by the theory of rational expectations in two of the three series one in which participants trade a complete set of arrow debreu securities and a second in which all participants have identical preferences double auction trading leads to efficient aggregation of diverse information and rational expectations equilibrium failure of the third series to exhibit such convergence demonstrates the importance of market institutions and trading instruments in achievement of equilibrium

judgemental overconfidence self monitoring and trading performance in an experimental financial market we measure the degree of overconfidence in judgment in the form of miscalibration i e the tendency to overestimate the precision of one s information and self monitoring a form of attentiveness to social cues of 245 participants and also observe their behaviour in an experimental financial market under asymmetric information miscalibrated traders underestimating the conditional uncertainty about the asset value are expected to be especially vulnerable to the winner s curse high self monitors are expected to behave strategically and achieve superior results our empirical results show that miscalibration reduces and self monitoring enhances trading performance the effect of the psychological variables is strong for men but non existent for women

the dynamics of overconfidence evidence from stock market forecasters as a group market forecasters are overconfident in the sense that they are miscalibrated while overconfidence is persistent respondents do exhibit some degree of rational learning in that they widen confidence intervals after failure as much as they narrow them after success market experience exacerbates overconfidence primarily through knowledge deterioration

proportional representation with citizen candidates we construct a simple model incorporating bothcitizen candidates and proportional representation andinvestigate its properties in a basic case with auniform distribution of citizen ideal points and purepolicy motivations and in further cases which allowof office rents and other distributions ofpreferences the idea of citizen candidates developedby osborne and slivinski 1996 besley and coate 1997 endogenises the decision to stand as acandidate and allows explicit study of the number andtype of candidates as an equilibrium phenomenon theidea of proportional representation allows a moreflexible relationship between the pattern of votescast and the final policy outcome and also providesa richer model of political representation ourdiscussion points to the widespread possibility ofequilibria involving non median policy outcomes provides insights into the relationship betweenproportional representation and the equilibrium numberof candidates and also provides an explicit accountof the trade off between candidate benefitsdistributed on a winner take all basis and those thatare mediated through proportional representation

experience and confidence in an internet based asset market experiment the experience effect in asset markets is one that was thought to be settled as subjects gained experience with the interface and each other they typically exhibit fewer instances of mispricing and at lower magnitudes but questions regarding trading experience are not easy to address in the lab with the typical subject pool since the kind of experience one can typically generate in the lab is experience with the experimental environment itself not with external environments however in virtual worlds asset markets are highly evolved providing a subject pool with skilled and experienced traders that can be accessed via the internet this study compares experimental asset markets with participants recruited from virtual world trading groups to experimental markets with participants recruited from the virtual world at large i further examine trader performance and trading behavior within markets the findings indicate that asset markets with virtual world participants recruited from trading groups are more prone to exhibit bubbles than are markets with virtual world participants recruited at large within condition experienced traders are less likely to follow fundamentals and more likely to engage in strategies that result in loss of earnings excess confidence is rejected as an explanation for this pattern as confidence is found to be related to higher earnings and fundamental value trading strategies

hindsight bias risk perception and investment performance once they have observed information hindsight biased agents fail to remember how ignorant they were initially they knew it all along we formulate a theoretical model of this bias providing a foundation for empirical measures and implying that hindsight biased agents learning about volatility will underestimate it in an experiment involving 66 students from mannheim university we find that hindsight bias reduces volatility estimates in another experiment involving 85 investment bankers in london and frankfurt we find that more biased agents have lower performance these findings are robust to differences in location information overconfidence and experience

individualism and stock price crash risk employing a sample of 26 473 firms across 42 countries from 1990 to 2013 we find that firms located in countries with higher individualism have higher stock price crash risk furthermore individualism can be transmitted by foreign investors from overseas markets to influence local firms crash risk and can exacerbate the impact of firm risk taking and earnings management on crash risk moreover the positive relation between individualism and crash risk is amplified during the global financial crisis and attenuated by enhanced country level financial information transparency and the adoption of international financial reporting standards

fiscal policy public debt stabilisation and politics theory and uk evidence this paper presents a two party model of fiscal and debt policy in which the parties do not care about policy outcomes when out of office unlike other models of this type our model has predictions that are largely consistent with existing empirical findings about partisan and electoral effects on government expenditure tax revenue and debt it also yields new predictions about how the feedback of fiscal policy on lagged debt may depend on partisan and electoral effects these new predictions are not rejected by a test of the model on uk data in multi party democracies the motives of the party in power undoubtedly affect fiscal and monetary policy many economists and political scientists believe that economic policy makers are driven by two not mutually exclusive motives first they wish to remain in office as long as possible the survival or opportunistic motive second they wish to benefit their constituencies partisan motive the effects of these motives may show up in two ways in the data first there may be effects of ideological differences of the parties in power on fiscal and monetary policy so called partisan effects for example we might expect left wing governments to tax and spend more and possibly accumulate more debt second there may be attempts by the incumbent party to use fiscal and monetary policy to bribe the electorate prior to elections e g by cutting taxes and interest rates so called electoral effects recent econometric work has established some interesting stylised facts which are broadly consistent with these predictions several studies report evidence of electoral effects on various fiscal policy instruments for the united states tufte i978 for transfers bizer and durlauf i990 for taxes and macdonald i99i for state level public expenditure more recently alesina et al i 992 i 993 have found evidence of electoral effects on government debt in a panel study of oecd countries evidence of partisan effects on fiscal policy is scarcer alesina et al i 993 report partisan effects on debt and roubini and sachs i989 report in a study of oecd democracies that countries with a higher percentage of left wing governments have significantly higher longrun government spending to gnp ratios concurrently with the accumulation of this evidence a theoretical literature notably alesina and tabellini 1990 rogoff 1990 and rogoff and sibert i 988 has provided new explanations of observed electoral effects on

monetary policy cooperation and multiple equilibria abstract we consider international monetary policy regimes in a world of two identical economies characterized by unemployment persistence in the non cooperative regime markov perfect nash equilibrium policies are generally not unique furthermore policies may be asymmetric in this otherwise symmetric model monetary policy cooperation also exhibits multiple equilibria but these are fewer and always symmetric cooperation may be counterproductive or beneficial for either country depending upon the initial non cooperative and resulting cooperative outcome

the politics of 1992 fiscal policy and european integration the internal market in europe will greatly increase the international mobility of resources how will this affect fiscal policy in different countries we consider taxation of capital in a two country model where a democratically chosen government in each country chooses tax policy higher capital mobility changes the politico economic equilibrium in two ways on the one hand it leads to more tax competition between the countries this economic effect tends to lower tax rates in both countries on the other hand it alters voters preferences and makes them elect a different government this political effect offsets the increased tax competition although not completely

irrationality and beliefs in a laboratory asset market is it me or is it you abstract this paper reports on an experiment designed to examine individual and market outcomes with a mixture of rational and non rational traders using values elicited via auctions we measure a specific form of irrationality the tendency to overweight high payoff low probability events or probability judgment error subjects are classified by their tendency to exhibit errors as well as their beliefs regarding whether others will make errors subjects then participate in a series of double auction markets the results indicate that both probability judgment error and beliefs about other subjects susceptibility to probability judgment error have significant impact on individual and market outcomes

the economics of split ticket voting in representative democracies in u s elections voters often vote for candidates from different parties for president and congress voters also express dissatisfaction with the performance of congress as a whole and satisfaction with their own representative the authors develop a model of split ticket voting in which government spending is financed by uniform taxes the benefits from this spending are concentrated while the model generates split ticket voting overall spending is too high only if the president s powers are limited overall spending is too high in a parliamentary system the authors model can be used as the basis of an argument for term limits copyright 1997 by american economic association

leadership and conflict we model the choice of leaders of groups within society where leaders influence both the mode of interaction between groups either peaceful compromise or costly conflict and the outcome of these interactions group members may choose leaders strategically instrumentally or they may choose leaders expressively we characterize the equilibria of the instrumental choice model and also argue that leadership elections may overemphasise the role of expressive considerations in the choice of leader and that this may result in increased conflict between groups

asset markets with insider trading disclosure rule and reselling constraint an experimental analysis abstract we investigate the impact of compulsory insider trading disclosure and its combination with a mandatory holding rule on price predictability and asset mispricing we modify the dynamic price adjustment model to account for insiders private information our results show that insiders produce weakly characterized price signals that induce a less than proportional price adjustment to the changes in the dividend value in both markets with disclosure rule and holding requirement in comparison with unregulated markets a shift in insiders strategies from information motivated to liquidity motivated trading appears to fuel the impairment of price predictability in regulated markets the exacerbation of asset mispricing in markets with holding restriction is characterized by a growth in the speculative transactions and loss making trading proposals

second order beliefs and the individual investor in a panel survey of individual investors we show that investors second order beliefs their beliefs about the return expectations of other investors influence investment decisions investors who believe others hold more optimistic stock market expectations allocate more of their own portfolio to stocks even after controlling for their own risk and return expectations however second order beliefs are inaccurate and exhibit several well known psychological biases we observe both the tendency of investors to believe that their own opinion is relatively more common among the population false consensus and that others who hold divergent beliefs are considered to be biased bias blind spot

the political economy of hatred this paper develops a model of the interaction between the supply of hate creating stories from politicians and the willingness of voters to listen to hatred hatred is fostered with stories of an out group s crimes but the impact of these stories comes from repetition not truth hate creating stories are supplied by politicians when such actions help to discredit opponents whose policies benefit an out group egalitarians foment hatred against rich minorities opponents of redistribution build hatred against poor minorities hatred relies on people accepting rather than investigating hate creating stories hatred declines when there is private incentive to learn the truth increased economic interactions with a minority group may provide that incentive this framework is used to illuminate the evolution of anti black hatred in the united states south episodes of anti semitism in europe and the recent surge of anti americanism in the arab world

economics and identity this paper considers how identity a person s sense of self affects economic outcomes we incorporate the psychology and sociology of identity into an economic model of behavior in the utility function we propose identity is associated with different social categories and how people in these categories should behave we then construct a simple game theoretic model showing how identity can affect individual interactions the paper adapts these models to gender discrimination in the workplace the economics of poverty and social exclusion and the household division of labor in each case the inclusion of identity substantively changes conclusions of previous economic analysis

portfolio choice and risk attitudes an experiment i introduction suppose an investor is faced with a decision concerning how to allocate financial resources between a risky lottery asset with a higher expected return and an asset with a fixed and guaranteed lower return is the choice of portfolio independent of preferences outside the standard neoclassical model in experiments with financial incentives we study how portfolio choice depends on three well documented behavioral phenomena ambiguity aversion the illusion of control and myopic loss aversion we also investigate whether participants are willing to explicitly pay a small sum of money to indulge such preferences pay for more perceived control less ambiguity or more frequent opportunities to change the portfolio based on feedback about its performance while standard finance theory presumes that investors successfully identify and process information relevant to reaching optimal decisions in recent years a body of empirical evidence suggests that there are systematic departures from this behavior behavioral finance is concerned with psychological influences in financial decision making and markets investors make decisions while trying to stay afloat in a sea of uncertainty when predictability is low people may be prone to unjustified beliefs that may survive and even flourish in such an environment 1 people may resort to rules of thumb on a conscious or subconscious level to the extent that psychological influences are present it is economically important to consider which of these actually affect risk attitudes and portfolio choice a key issue is whether any such influences disappear when monetary incentives are present we pursue a systematic experimental comparison of three of the most prominent behavioral phenomena documented in the literature the illusion of control langer 1975 is concerned with greater confidence in one s predictive ability or in a favorable outcome when one has a higher degree of personal involvement even when one s involvement is not actually relevant ambiguity aversion ellsberg 1961 is the desire to avoid unclear circumstances even when this will not increase the expected utility myopic loss aversion benartzi and thaler 1995 combines loss aversion kahneman and tversky 1979 tversky and kahneman 1992 and a tendency to evaluate outcomes frequently this combination leads investors to be more willing to invest a greater proportion of their portfolio in risky assets if they evaluate their investments less frequently we show that these phenomena are present with monetary incentives and also investigate whether people are willing to pay money to accommodate such preferences or whether they are closer to the rational model when incentives are present with the procedure we chose the willingness to actually pa for such preferences depends on the preference the great majority of investors pay for less ambiguity or more frequent feedback investment opportunities but fewer than 10 pay to roll a determinative die themselves 2 we then examine how the preferences between lotteries in the different treatments affect portfolio choice we have participants allocate their investment capital between an asset with a sure return and a risky asset with a higher expected rate of return in fact there is very little variation in investment behavior across any of the illusion of control or ambiguity aversion treatments in contrast the results found in previous experimental studies of myopic loss aversion suggest that participants invest less in their preferred option the main conclusion we draw from these findings is that the relation between which procedure or lottery people prefer and how much they are willing to actually invest in this lottery is not trivial at all people are generally unwilling to pay even small amounts of money to indulge the illusion of control and it does not influence their portfolio choice people are generally willing to pay money for less ambiguity but having less ambiguity does not influence their portfolio choice finally in some cases people are willing to pay money for more frequent feedback and opportunities to change their portfolio but again previous studies have shown that people invest less with this additional information and greater flexibility

how much information is incorporated in financial asset prices experimental evidence we propose a new estimation method and use experimental data from multiple double auction experiments in the literature to directly estimate how much information is incorporated in financial market prices we find that public information is almost completely reflected in prices but that surprisingly little private information less than 50 is incorporated in prices our estimates therefore suggest that while semi strong informational efficiency is consistent with the data financial market prices may be very far from strong form efficiency we compare our estimates with beliefs of economists surveyed at the econometric society meetings and find that economists and finance researchers alike expect market prices to reflect considerably more private information than what we estimated

confidence and decision making in experimental asset markets abstract this paper examines how traders confidence and market confidence affect outcomes in an experimental asset market with known fundamental values in this type of market prices usually present large deviations from the fundamental value in other words bubbles are known to occur we measure beliefs by asking participants to forecast the one period ahead price as a discrete probability mass distribution we define confidence as the inverse of the dispersion of beliefs for each trader and also create a market wide measure of this to measure agreement across traders we find that confidence affects price formation and is also important in explaining the dynamics and size of the bubble moreover as traders are successful they become increasingly certain of their beliefs even if these beliefs are on non fundamental values thus increasing the likelihood of price bubbles

the impact of experience on risk taking overconfidence and herding of fund managers complementary survey evidence abstract empirical research has shown that inexperienced fund managers yield significantly higher returns than their more experienced colleagues if the portfolios of inexperienced are not more risky this result would contradict the hypothesis of market efficiency therefore it is an important question whether inexperienced fund managers tend to taker higher risks higher risk taking may be explained by a higher degree of overconfidence less herding behavior or a lower degree of risk aversion since the results concerning the relationship between experience and risk taking in previous studies are rather contradictory we provide complementary survey evidence of 117 german fund managers which can improve our understanding in this field in line with the results of previous studies we find that herding is decreasing with experience while the evidence concerning risk taking and overconfidence is mixed nevertheless our results provide some support for the hypothesis that inexperienced managers do indeed take higher risks

the bull of wall street experimental analysis of testosterone and asset trading growing evidence shows that biological factors affect individual financial decisions that could be reflected in financial markets testosterone a chemical messenger especially influential in male

emotional arousal as a source of bounded rationality abstract this paper proposes an alternative psychological explanation for bounded rationality according to herbert simon bounded rationality arises from human cognitive limitations following the suggestion of institutional economist john r commons i argue that extremes in emotional arousal also contribute to bounded rationality this idea is formalized and developed using the yerkes dodson law from psychology examples from the popular press and the academic literatures of law management and economics are presented to illustrate the impact of this type of bounded rationality on human behavior

overconfidence and excess entry an experimental approach psychological studies show that most people are overconfident about their own relative abilities and unreasonably optimistic about their futures e g shelly e taylor and j d brown 1988 neil d weinstein 1980 when assessing their position in a distribution of peers on almost any positive trait like driving ability ola svenson 1981 income prospects or longevity a vast majority of people say they are above the average although of course only half can be if the trait is symmetrically distributed this paper explores whether optimistic biases could plausibly and predictably influence economic behavior in one particular setting entry into competitive games or markets many empirical studies show that most new businesses fail within a few years for example using plant level data from the u s census of manufacturers spanning 1963 1982 timothy dunne et al 1988 estimated that 61 5 percent of all entrants exited within five years and 79 6 percent exited within 10 years most of these exits are failures see also dunne et al 1989a 1989b d shapiro and r s khemani 1987

arrogance can be a virtue overconfidence information acquisition and market efficiency abstract in behavioral finance overconfidence has been established as a prevalent psychological bias which can make markets less efficient by creating mispricing in the form of excess volatility and return predictability in this paper we develop a model in which overconfidence causes investors to overinvest in information acquisition when this information could improve market efficiency by driving prices closer to true values we study the impact of overconfidence on mispricing and information acquisition comparing their net effect on prices we derive several novel implications first overconfidence generally improves market pricing provided the level of overconfidence is not too high pricing can also improve even when overconfidence is arbitrarily high depending on the amount of private information acquired relative to publicly available information

economic theories of voter turnout i the voting paradox why would the rational individual bother to spend time and resources to become well informed go to the polls on the election day and maybe even wait in a queue why would a rational voter vote downs 1957 ii the paradox of indeterminacy if they vote why do they care who they vote for kirchgassner 1992 kirchgassner and pommerehne 1993 iii the paradox of ignorance to the extent that information is costly the rational voter must be ignorant about relevant aspects of his decision making downs 1957

rational choice theory and the paradox of not voting at least since downs s 1957 seminal work an economic theory of democracy rational choice theorists have appreciated the paradox of not voting in a large election the probability that an individual vote might change the election outcome is vanishingly small if each person only votes for the purpose of influencing the election outcome then even a small cost to vote like a minor schedule conflict or mildly bad weather should dissuade anyone from voting yet it seems that many people will put up with long lines daunting registration requirements and even the threat of physical violence or arrest in order to vote given the central place of voting within political economy the lack of an adequate rational choice model of large elections with costly voting presents an obvious problem for the most part theorists have bypassed the turnout problem either by eliminating voters as strategic actors or by assuming that the decision to vote is independent of other strategic choices the problem with the first approach is that the empirical literature on voting behavior provides considerable evidence of apparently strategic behavior in primary elections there is evidence that voters condition their vote choice on the viability of candidates abramson aldrich paolino and rohde 1992 in a seminal and comprehensive study cox 1997 shows that voting patterns and election outcomes are broadly consistent with patterns of behavior predicted by strategic voting models for example under plurality rule in which the candidate with the most votes wins the election

preference reversals for ambiguity aversion this paper finds preference reversals in measurements of ambiguity aversion even if psychological and informational circumstances are kept constant the reversals are of a fundamentally different nature than the reversals found before because they cannot be explained by context dependent weightings of attributes we offer an explanation based on sugden s random reference theory with different elicitation methods generating different random reference points then measurements of ambiguity aversion that use willingness to pay are confounded by loss aversion and hence overestimate ambiguity aversion this paper was accepted by teck ho decision analysis

is financial instability male driven gender and cognitive skills in experimental asset markets abstract the hypothesis that price stability would reliably increase with the fraction of women operating in financial markets has been frequently suggested in policy discussions to test this hypothesis we conducted 10 male only 10 female only and 10 mixed gender experimental asset markets and compared the effects of gender composition confidence risk attitude and cognitive skills male and female markets have comparable volatility and deviations from fundamentals whereas mixed gender markets are substantially more stable on the other hand higher average cognitive skills of the group are associated with reduced market volatility individual level analysis shows that subjects with higher cognitive skills trade at prices closer to fundamental values and earn significantly higher profits similarly mixed markets exhibit lower mispricing particularly for traders with lower cognitive skills our results are demonstrated to hold in other experimental asset market studies suggesting that a mixed gender composition reduces mispricing across different types of asset markets

can observers predict trustworthiness abstract we investigate whether experimental subjects can predict behavior in a prisoner s dilemma played on a tv show subjects report probabilistic beliefs that a player cooperates before and after the players communicate subjects correctly predict that women and players who make a voluntary promise are more likely to cooperate they are able to distinguish truth from lies when a player is asked about her intentions by the host subjects are to some extent able to predict behavior their beliefs are 7 percentage points higher for cooperators than for defectors we also study their bayesian updating beliefs do not satisfy the martingale property and display mean reversion

meese rogoff redux micro based exchange rate forecasting meese rogoff redux micro based exchange rate forecasting by martin d d evans and richard k lyons this paper compares the true ex ante fore casting performance of a micro based model against both a standard macro model and a random walk in contrast to existing literature which is focused on longer horizon forecasting we examine forecasting over horizons from one day to one month the one month horizon being where micro and macro analysis begin to over lap over our three year forecasting sample we find that the micro based model consistently outperforms both the random walk and the macro model micro based forecasts account for almost 16 percent of the sample variance in monthly spot rate changes these results pro vide a level of empirical validation as yet unat tained by other models the forecasting experiment proposed by richard meese and kenneth rogoff 1983 re mains a benchmark against which exchange rate models are judged their result that structural macro models cannot outperform a naive random walk has proved robust over the decades yet the meese rogoff paper was never about forecasting in the true sense i e using tirrie f information to forecast exchange rates at t 1 b y using concurrent realized values of the forcing variables their regressions were more about concurrent explanation than about ex ante forecasting their only forecast ing element is in their reliance on ex ante data to estimate equation parameters which appro priately penalized models whose estimated pa rameters were unstable tion for the random walk nature of exchange rates is that there exists some unobserved fun damental that itself follows a random walk un observed being important because fundamentals proposed in most macro models do not follow random walks they offer a different explana tion one rooted in the asset approach to ex change rates and the present value relation that follows from it specifically they show that i f fundamentals are 1 1 but not necessarily ran dom walks then as the discount factor in the present value relation approaches 1 the ex change rate will follow a process arbitrarily close to a random walk intuitively given that an 1 1 process can be split into random walk and stationary components a discount factor near 1 means that most all of the weight is placed on fundamentals far into the future ex pectations of which are dominated by the random walk component charles engel and kenneth west 2004 2005 provide a valuable perspective on the forecastability of exchange rates one explana this paper takes the analysis of engel and west as an important reorientation of thinking and brings it to the natural next step specifi cally if there is little room for forecasting based on stationary components of fundamentals then one needs to focus on where all the action is namely exchange rate dynamics that come from expectational surprises though the sur prise part is by definition orthogonal to public information our micro based model shows that there should exist types of nonpublic infor mation that are useful for forecasting this part and where to look for these types of informa tion we then locate data on these types of nonpublic information and test whether they have true ex ante forecasting power we should evans department of economics georgetown uni versity washington dc 20057 and nber lyons haas school of business university of california berkeley c a 94720 1900 and nber we are grateful to ken west for his comments and to the national science foundation for financial support we refrain from using the word news because it has too strong an association with macro information that is public which even in the most careful of event studies explains less than 5 percent of exchange rate variation in total see torben andersen et al 2003

the disposition effect in securities trading an experimental analysis the disposition effect is the tendency to sell assets that have gained value winners and keep assets that have lost value losers disposition effects can be explained by the two features of prospect theory the idea that people value gains and losses relative to a reference point the initial purchase price of shares and the tendency to seek risk when faced with possible losses and avoid risk when a certain gain is possible our experiments were designed to see if subjects would exhibit disposition effects subjects bought and sold shares in six risky assets asset prices fluctuated in each period contrary to bayesian optimization subjects did tend to sell winners and keep losers when the shares were automatically sold after each period the disposition effect was greatly reduced

voting when money and morals conflict an experimental test of expressive voting abstract moral considerations may matter much in voting because the costs of expressing support for a morally worthy cause may be low in a referendum these costs depend on whether a voter expects to affect the outcome of the referendum to test the low cost theory of expressive voting we experimentally investigate a proposal to tax everyone and to donate tax revenues the analysis of expectations and voting decisions shows that the low cost theory fails to explain voting decisions instead we find that voters tend to approve of the proposal if they expect others to approve too

trading as entertainment among 1 000 german brokerage clients for whom both survey responses and actual trading records are available investors who report enjoying investing or gambling turn over their portfolio at twice the rate of their peers including entertainment attributes as additional explanatory variables in cross sectional regressions of portfolio turnover on objective investor attributes more than doubles the fraction of the total variation of portfolio turnover that can be explained the results are robust to controlling for gender and proxies for overconfidence constructed from survey responses nonpecuniary benefits of trading thus appear to offer a straightforward explanation of the excessive trading puzzle

self confidence and personal motivation the maintenance and enhancement of self esteem has always been identified as a fundamental human impulse philosophers writers educators and of course psychologists have all emphasized the crucial role played by self image in motivation affect and social interactions the aim of this chapter is to bring these concerns into the realm of economic analysis and show that this has important implications for how agents process information and make decisions conversely the tools of economic modelling can help shed light on a number of apparently irrational behaviours documented by psychologists

a model of political competition with citizen candidates the authors develop a model of electoral competition in which citizens choose whether or not to run as candidates a winner implements her favorite policy the equilibrium number of candidates depends negatively on the cost of running and positively on the benefits of winning for some parameter values all equilibria under plurality rule have exactly two candidates whose positions are distinct two candidate elections are more likely under plurality rule than under a runoff system the candidates positions are less differentiated under a runoff system there exist equilibria under both systems in which some candidates have no chance of winning

overconfidence subjective perception and pricing behavior abstract we study the implications of overconfidence for price setting in a monopolistic competition setup with incomplete information our price setters overestimate their abilities to infer aggregate shocks from private signals the fraction of uninformed firms is endogenous firms can obtain information by paying a fixed cost we find two results i overconfident firms are less inclined to acquire information relative to the rational benchmark ii prices might exhibit excess volatility driven by non fundamental noise we explore the empirical predictions of our model for idiosyncratic price volatility

electoral and partisan cycle regularities in canada in this paper following recent politico institutional approaches to the theory of economic policy the authors present a methodology for identifying political cycle regularities and test for electoral and partisan cycles in canadian target variables and monetary and fiscal policy instruments using annual data from 1926 to 1994 the empirical evidence suggests the absence of political cycles in canada