examining the relationship between visual attention and stated preferences a discrete choice experiment using eye tracking abstract we examine the relationship between visual attention and stated preferences derived from a discrete choice experiment focussing on consumer preferences regarding country of origin food labels we employ a bayesian infinite mixture logit to derive results that reveal patterns of respondent heterogeneity that would not be captured assuming that random parameters take a specific distributional form our results reveal weak relationships between the eye tracking data our stated preference results and various attribute use questions although respondents with higher levels of visual attendance value specific attributes more highly the strength of the relationship is fairly weak therefore whilst we maintain that eye tracking is useful we argue that there needs to be greater clarity about the aims and purpose of using eye tracking in stated preference research

rational inattentiveness in a forecasting experiment while standard theory assumes rational optimizing agents under full information the latter is rarely found in reality information has to be acquired and processed both involving costs in rational inattentiveness models agents update their information set only when the benefit outweighs the information cost we test the rational inattentiveness model in a controlled laboratory environment our design is a forecasting task with costly information and a clear cost benefit structure while we find numerous deviations from the model predictions on the individual level the aggregate results are consistent with rational inattentiveness and sticky information models rejecting simpler behavioral heuristics

quantifying and understanding the economics of large financial movements abstract financial market data offer the exciting possibility of quantifying and understanding the physics of a complex dynamical system and the hope that this line of thinking may give some insights into understanding collective human behavior various measures of stock market activity have been found to exhibit puzzling features that have recently attracted much research attention these features include the power law distributions of return volume number of trades assets under management of trading institutions and other power law relations linking them here we review these empirical results and show that some of these findings can be usefully interpreted within the framework of a reduced form model gabaix x gopikrishnan p plerou v stanley h e 2003 a theory of power law distributions in financial market fluctuations nature 423 267 270 and an economic model gabaix x gopikrishnan p plerou v stanley h e 2006b institutional investors and stock market volatility quarterly journal of economics 121 461 504 the features not only present a challenge to models of market fluctuations but their specific power law nature also suggests new modeling directions which include ideas from statistical physics which proved useful in understanding similar relationships that occur in the physics of critical phenomena

time is money time pressure incentives and the quality of decision making many decisions in economics and finance have to be made under severe time pressure furthermore payoffs frequently depend on the speed of decision making as for instance when buying and selling stocks in this paper we examine the influence of time pressure and time dependent incentive schemes on the quality of decision making in an experimental beauty contest game we find that convergence to equilibrium is faster and payoffs are higher under low time pressure than under high time pressure interestingly time dependent payoffs under high time pressure lead to significantly quicker decision making without reducing the quality of decisions

who ll stop lying under oath empirical evidence from tax evasion games using two earned income tax declaration experimental designs we show that only partial liars are affected by a truth telling oath a non price commitment device under oath we see no change in the number of chronic liars and fewer partial liars rather than smoothly increasing their compliance we also observe that partial liars who respond to the oath respond by becoming fully honest under oath based on both response times data and the consistency of subjects when several compliance decisions are made in a row we show that partial lying arises as the result of weak preferences towards profitable honesty the oath only transforms people with weak preferences for lying into being committed to the truth

lottery choice incentives complexity and decision time this paper reports the results of an experiment on lottery choice in which decision cost is measured as decision making time a simple decision cost model motivates this measurement and the experiment and predicts relationships between incentive mechanism manipulations and decision making time which are borne out in the experiment the decision cost model also suggests that decisions will change in the face of the incentive manipulations in the experiment this suggestion is borne out in a complex decision making environment but not in a simple one specification tests demonstrate that observed changes in subjects behavior are not merely due to changes in subject specific error variance one may conclude from this that the payoff dominance problem is a real issue in complex decision making experiments copyright 1993 by royal economic society

imperfect choice or imperfect attention understanding strategic thinking in private information games to understand the thinking process in private information games we use mousetracking to record which payoffs subjects attend to the games have three information states and vary in strategic complexity subjects consistently deviate from nash equilibrium choices and often fail to look at payoffs which they need to in order to compute an equilibrium response choices and lookups are similar when stakes are higher when cluster analysis is used to group subjects according to lookup patterns and choices three clusters appear to correspond approximately to level 3 level 2 and level 1 thinking in level k models and a fourth cluster is consistent with inferential mistakes as for example in qre or cursed equilibrium theories deviations from nash play are associated with failure to look at the necessary payoffs the time durations of looking at key payoffs can predict choices to some extent at the individual level and at the trial by trial level

economic insights from neuroeconomic data how and to what extent neuroeconomic data broadly interpreted as data other than standard choice data should be used in advancing economic theory is open to question several authors have attempted to make use of such nonstandard data to shed light on the process of economic decision making john w payne james r bettman and eric j johnson 1993 miguel costa gomes vincent p crawford and bruno broseta 2001 and xavier gabaix et al 2006 have used mouselab software in order to determine the manner in which people use information joseph wang michael spezio and colin camerer 2006 make use of eye tracking data for the same purpose more dramatically researchers such as paul william glimcher joseph kable and kenway louie 2007 are using brain scanning data in an attempt to constrain economic models of discounting and time preference camerer forthcoming presents an excellent review of economic research involving nonstandard data in opposition to this trend faruk gul and wolfgang pesendorfer forthcoming present a strong critique of the use of nonchoice data within economics they put forward two specific arguments that users of neuroeconomic data must refute if their work is to be taken seriously first economic models were designed only to explain choices thus nonchoice data can be used neither to confirm nor deny a particular economic model second it is by and large true that economists are interested in choice behavior any two models will either make different predictions for choice in which case they can be differentiated by standard choice data or they will not in which case an economist will not be interested in differentiating between them economic insights from neuroeconomic data

correlation neglect in belief formation many information structures generate correlated rather than mutually independent signals the news media being a prime example this article provides experimental evidence that many people neglect the resulting double counting problem in the updating process in consequence beliefs are too sensitive to the ubiquitous telling and re telling of stories and exhibit excessive swings we identify substantial and systematic heterogeneity in the presence of the bias and investigate the underlying mechanisms the evidence points to the paramount importance of complexity in combination with people s problems in identifying and thinking through the correlation even though most participants in principle have the computational skills that are necessary to develop rational beliefs many approach the problem in a wrong way when the environment is moderately complex thus experimentally nudging people s focus towards the correlation and the underlying independent signals has large effects on beliefs

the distribution of the u s capital stock between residential and industrial uses the purpose of the present study is to measure the extent to which an increase in the total capital stock induces an increase in the stock of residential capital i e to measure the marginal propensity of additional capital to be absorbed in residential capital a knowledge of this propensity is important to evaluate the national return on additional saving and to understand the impact that an increased capital stock could have on labor productivity and on the composition of national output the present paper provides both a theoretical and an empirical examination of this question this abstract was borrowed from another version of this item

from the lab to the field a review of tax experiments tax experiments have been gaining momentum in recent years although this literature dates back several decades with new developments in methods and data availability tax experiments have gradually moved away from lab settings and towards the field this movement from the lab to the field has happened against the background of the credibility revolution in applied economics which has seen more rigorous methods applied to policy relevant questions and of the availability to researchers of administrative data from tax returns these developments have allowed significant advances in the experimental literature on tax compliance this paper reviews this literature giving particular attention to field experiments using administrative data but putting them in the broader context of the compliance literature a particular effort is made to take a global perspective in a literature that is only recently seeing the emergence of evidence from africa latin america and asia

the dual process drift diffusion model evidence from response times we introduce a model of response time and choice that borrows from two distinct psychological traditions as in dual process models rapid automatic decisions are qualitatively different from considered decisions as in the drift diffusion model delayed considered decisions occur when confidence hits a threshold level we conduct a simple experiment in which our hybrid model matches key properties of the data as our model predicts decision times are bimodal automatic decisions are of far lower quality than considered decisions and automatic decisions are more prevalent when prior information improves thereby raising their quality jel d83 d87 c91

social programs as positive inducements for tax participation a significant amount of non compliance with the personal income tax is due to individuals who have not filed a tax return and so who are not in the system we use experimental laboratory methods to examine the effect of positive inducements for filing a tax return our design captures the essential features of a voluntary income reporting and tax assessment system human participants earn income they must decide whether to file a tax return and conditional upon filing they must choose how much income to report taxes are paid on reported income only unreported income of filers may be discovered via a random audit and the participant then pays owed taxes plus a fine inducements for filing are introduced as treatments a social safety net e g unemployment replacement income that is conditional upon past filing behavior and a tax credit that is available only to those who file our results suggest that an untargeted tax credit can encourage participation but that targeting the credit to low income earners offers a stronger inducement to file also the provision of a social safety net via unemployment benefits has a positive albeit an indirect impact on participation

thinking ahead the decision problem we propose a model of costly decision making based on time costs of deliberating current and future decisions we model an individual decision maker s thinking process as a thought experiment that takes time and let the decision maker think ahead about future decision problems in yet unrealized states of nature by formulating an intertemporal state contingent planning problem which may involve costly deliberation in every state of nature and by letting the decision maker deliberate ahead of the realization of a state we attempt to capture the basic observation that individuals generally do not think through a complete action plan instead individuals prioritize their thinking and leave deliberations on less important decisions to the time or event when they arise

information acquisition under risky conditions across real and hypothetical settings i collect data on how subjects acquire information about risky choices in both real and hypothetical settings using process tracing software called mouselab on average there are no significant differences across settings in the amount of time subjects take to make a choice or the completeness of the information they acquire subjects also acquire information in sequences consistent with an integration model of decision making such as expected utility theory or prospect theory i do not find significant differences in risk preferences across settings on average but i do find that subjects risk preferences are related to the completeness of the information that they acquire and where they start their information acquisition jel c91 d80 d83

status quo maintenance reconsidered changing or incomplete preferences after reviewing the evidence for status quo maintenance sqm i consider how to reconcile sqm with traditional consumer theory behavioural economists usually let agents preferences change as a function of their endowments treating the same person with different endowments as a set of distinct agents many properties of preferences then become immune to empirical test and it becomes impossible to judge whether an agent s decisions make the agent better or worse off this impedes prediction of when decision rules are likely to change sqm can alternatively be explained with unchanging preferences if preferences are incomplete sqm is then consistent with self interest and there is no reason why it should not persist

guessing with negative feedback an experiment we investigate experimentally a new variant of the beauty contest game bcg in which players actions are strategic substitutes a negative feedback bcg our results show that chosen numbers are closer to the rational expectation equilibrium than in a strategic complements environment a positive feedback bcg we also find that the estimated average depth of reasoning from the cognitive hierarchy model does not differ between the two environments we show that the difference may be attributed to the fact that additional information is more valuable when players actions are strategic substitutes rather than strategic complements in line with other recent experimental findings

rational inattention optimal consideration sets and stochastic choice we unite two basic approaches to modelling limited attention in choice by showing that the rational inattention model implies the formation of consideration sets only a subset of the available alternatives will be considered for choice we provide necessary and sufficient conditions for rationally inattentive behaviour which allow the identification of consideration sets in simple settings chosen options are those that are best on a stand alone basis in richer settings the consideration set can only be identified holistically in addition to payoffs prior beliefs impact consideration sets linear inequalities identify all priors consistent with each possible consideration set

benefits of neuroeconomic modeling new policy interventions and predictors of preference neuroeconomics strives to use knowledge from neuroscience to improve models of decisionmaking here we introduce a biologically plausible drift diffusion model that is able to jointly predict choice behavior and response times across different choice environments the model has both normative and positive implications for economics first we consistently observe that decisionmakers inefficiently allocate their time to choices for which they are close to indifference we demonstrate that we can improve subjects welfare using a simple intervention that puts a time limit on their choices second response times can be used to predict indifference points and the strength of preferences

learning about unstable publicly unobservable payoffs neoclassical finance assumes that investors are bayesian in many realistic situations bayesian learning is challenging here we consider investment opportunities that change randomly while payoffs are observable only when invested in a stylized version of the task we wondered whether performance would be affected if one were to follow reinforcement learning principles instead the answer is a definite yes when asked to perform our task participants overwhelmingly learned in a bayesian way they stopped being bayesians though when not nudged into paying attention to contingency shifts this raises an issue for financial markets who has the incentive to nudge investors

do consumers need more protection from small dollar lenders historical evidence and a roadmap for future research we summarize the current debate surrounding four small dollar credit products pawn loans vehicle title loans payday loans and cash installment loans from finance companies we review the contributions of scholars that inform this debate we underscore that users of these products fit the description of those whom consumer credit models predict benefit from these products many studies find that on average consumer use of small dollar credit products is at worst innocuous there are however findings of heterogeneity in borrowers experiences the disagreements surrounding these credit products and the difficulty in crafting the proper policy response stems from this heterogeneity jel d18 g23

no news is news do markets underreact to nothing as illustrated in the tale of the dog that did not bark the absence of news and the passage of time often contain information we test whether markets fully incorporate this information using the empirical context of mergers during the year after merger announcement the passage of time is informative about the probability that the merger will ultimately complete we show that the variation in hazard rates of completion after announcement strongly predicts returns this pattern is consistent with a behavioral model of underreaction to the passage of time and cannot be explained by changes in risk or frictions

the aversion to lying abstract we experimentally investigate the effect of cheap talk in a bargaining game with one sided asymmetric information a seller has private information about her skill and is provided an opportunity to communicate this information to a buyer through a written message four different treatments are compared one without communication one with free form communication and two treatments with pre specified communication in the form of promises of varying strength our results suggest that individuals have an aversion towards lying about private information and that the aversion to lying increases with the size of the lie and the strength of the promise freely formulated messages lead to the fewest lies and the most efficient outcomes

pinocchio s pupil using eyetracking and pupil dilation to understand truth telling and deception in sender receiver games we conduct laboratory experiments on sender receiver games with an incentive for senders to exaggerate such as security analyst s painting a rosy picture about earnings prospects our results show that overcommunicati on messages are more informative of the true state than they should be in equilibri um is consistent with a level k model eyetracking shows that senders look much more on the payoff rows corresponding to the true state and much less at receiver payoffs than at their own payoffs senders pupils also dilate more when their deception is larger in magnitude together these data are consistent with the hypothesis that figuring out ho w to deceive another player is cognitively difficult as assumed in the level k mod el a combination of sender messages and lookup patterns predicts the true state about t wice as often as predicted by equilibrium using these measures would enable receiver subjects to hypothetically earn up to 16 21 percent more than they actually do

neuroeconomic foundations of economic choice recent advances neuroeconomics combines methods and theories from neuroscience psychology economics and computer science in an effort to produce detailed computational and neurobiological accounts of the decision making process that can serve as a common foundation for understanding human behavior across the natural and social sciences because neuroeconomics is a young discipline a sufficiently sound structural model of how the brain makes choices is not yet available however the contours of such a computational model are beginning to arise and given the rapid progress there is reason to be hopeful that the field will eventually put together a satisfactory structural model this paper has two goals first we provide an overview of what has been learned about how the brain makes choices in two types of situations simple choices among small numbers of familiar stimuli like choosing between an apple or an orange and more complex choices involving tradeoffs between immediate and future consequences like eating a healthy apple or a less healthy chocolate cake second we show that even at this early stage insights with important implications for economics have already been gained

the allocation of time in decision making we study the allocation of time across decision problems if a decision maker 1 has noisy estimates of value 2 improves those estimates the longer he or she analyzes a choice problem and 3 allocates time optimally then the decision maker should spend less time choosing when the difference in value between two options is relatively large to test this prediction we ask subjects to make 27 binary incentive compatible intertemporal choices and measure response time for each decision our time allocation model explains 54 of the variance in average decision time these results support the view that decision making is a cognitively costly activity that uses time as an input allocated according to cost benefit principles

a testable theory of imperfect perception we provide a new characterization of bayesian expected utility maximization the novel feature of the model is our separation of actions from prizes the signature of the resulting theory is the impossibility of raising utility by switching wholesale from one action to another we provide applications to robustness to the recovery of utility from choice data and to model

order in product customization decisions evidence from field experiments differentiated product models are predicated on the belief that a product s utility can be derived from the summation of utilities for its individual attributes in one framed field experiment and two natural field experiments we test this assumption by experimentally manipulating the order of attribute presentation in the product customization process of custom made suits and automobiles we find that order affects the design of a suit that people configure and the design and price of a car that people purchase by influencing the likelihood that they will accept the default option suggested by the firm

fact free learning aragones acknowledges financial support from the spanish ministry of science and technology grant sec2003 01961 and creabarcelona economics aragones gilboa and schmeidler gratefully acknowledge support from the polarization and conflict project cit 2 ct 2004 506084 funded by the european commission dg research sixth framework programme gilboa and schmeidler gratefully acknowledge support from the israel science foundation grant 790 00 and 975 03 postlewaite gratefully acknowledges support from national science foundation grant sbr 9810693

stochastic choice an optimizing neuroeconomic model a model is proposed in which stochastic choice results from noise in cognitive processing rather than random variation in preferences the mental process used to make a choice is nonetheless optimal subject to a constraint on available information processing capacity that is partially motivated by neurophysiological evidence the optimal information constrained model is found to oer a better t to experimental data on choice frequencies and reaction times than either a purely mechanical process model of choice the drift diusion

the benefits of forced experimentation striking evidence from the london underground network we estimate that a signi cant fraction of commuters on the london underground do not travel their optimal route consequently a tube strike which forced many commuters to experiment with new routes taught commuters about the existence of superior journeys bringing about lasting changes in behavior this eect is stronger for commuters who live in areas where the tube map is more distorted thereby pointing towards the importance of informational imperfections we argue that the information produced by the strike improved network e ciency search costs are unlikely to explain the suboptimal behavior instead individuals seem to under experiment in normal times as a result of which constraints can be welfare improving jel classi cation d83 l91 r41

limited horizon forecast in repeated alternate games abstract in two player infinite horizon alternating move games a limited forecast n 1 n 2 equilibrium is such that 1 player i chooses actions according to his n i length forecasts so as to maximise the average payoff over the forthcoming n i periods and 2 players equilibrium forecasts are correct with finite action spaces n 1 n 2 solutions always exist and are cyclical and the memory capacity of the players has no influence on the set of solutions a solution is hyperstable if it is an n 1 n 2 solution for all n 1 n 2 sufficiently large hyperstable solutions are shown to exist and are characterized for generic repeated alternate move 2 2 games journal of economic literature classification numbers c72 d81

a sparsity based model of bounded rationality this article defines and analyzes a sparse max operator which is a less than fully attentive and rational version of the traditional max operator the agent builds as economists do a simplified model of the world which is sparse considering only the variables of first order importance his stylized model and his resulting choices both derive from constrained optimization still the sparse max remains tractable to compute moreover the induced outcomes reflect basic psychological forces governing limited attention the sparse max yields a behavioral version of basic chapters of the microeconomics textbook consumer demand and competitive equilibrium i obtain a behavioral version of marshallian and hicksian demand arrow debreu competitive equilibrium the slutsky matrix the edgeworth box roy s identity and so on the slutsky matrix is no longer symmetric nonsalient prices are associated with anomalously small demand elasticities because the consumer exhibits nominal illusion in the edgeworth box the offer curve is a two dimensional surface rather than a one dimensional curve as a result different aggregate price levels correspond to materially distinct competitive equilibria in a similar spirit to a phillips curve the arrow debreu welfare theorems typically do not hold this framework provides a way to assess which parts of basic microeconomics are robust and which are not to the assumption of perfect maximization jel codes d01 d03 d11 d51

gain loss framing in interdependent choice abstract framing influences choice however little is known about the underlying mechanisms behind framing effects we study gain loss framing in binary modified dictator games subjects choose the selfish option more often in the loss frame compared to the gain frame recording visual fixations with eye tracking we find that dictators focus more on their own outcomes when facing losses this suggests that losses to the own outcome are weighted more than losses to another player

the search for a stable money demand function a survey of the post 1973 literature phe question of whether the demnand function for money is stable is one of the most important recurring issues in the theory and application of macroeconomic policy what is being sought in a stable demand function is a set of necessary conditions for money to exert a predictable influence on the economy so that the central bank s control of the money supply can be a useful instrument of economic policy as such the notion of a stable demand function appears to involve three key elements e g john t boorman 1976 p 317 and david e w laidler 1977 pp 34 35 first the demand for money relation should be highly predictable in a statistical sense as measured by the usual goodness of fit statistics precision of estimated coefficients and presumably its ability to forecast accurately out of sample second a stable demand function for money has relatively few arguments a relationship that requires knowledge about a large number of variables in order to pin it down is in effect not predictable finally the variables that appear as arguments in the function should represent significant links to spending and economic activity in the real sector in sum a stable demand function for money means that the quantity of money is predictably related to a small set of key variables linking money to the real sector of the economy the importance of a stable money demand function for monetary policy can be illustrated with the standard is lm model in which interest rates and gnp are the endogenous variables in this context a stable demand function for money translates into a well defined relationship between money interest rates and gnp

decision time consideration time and status quo bias economists increasingly appreciate the value of studying the time taken to make decisions in order to provide insights into decision makers choices this article shows that studying how time is allocated among individual options is also valuable in helping researchers to understand the impact default options have on decision makers attention allocation as approximated by how the time is allocated the study of this impact generates new insights into the well known choice phenomenon of status quo bias which typically refers to decision makers tendency to stick to a default option by designing a series of novel experiments i find that this bias arises even when the choice is among prizes of fixed monetary value expressed in arithmetic form i also find asymmetric attention i e more time devoted to default options and strikingly asymmetric choice errors specifically decision makers fail to select an alternative better than the default 28 of the time while they incorrectly select an alternative worse than the default only 11 of the time and provide evidence supporting a causal relationship between asymmetric attention and asymmetric errors jel d03 d12 d83

exchange rate dynamics an empirical investigation this paper estimates a reduced form exchange rate equation whose estimates are used to address questions on exchange rate overshooting intermediate run exchange rate dynamics and long run proportionality relationships between relative money supplies and exchange rates based on swiss u s data from the period 1973 79 the major findings are that following a monetary shock there is short run exchange rate overshooting by a factor of about two and that subsequent exchange rate adjustments to a new long run equilibrium take longer than 2 years and exhibit nonmonotonic patterns

empirical models of the exchange rate separating the wheat from the chaff various popular exchange rate models a standard monetary model a portfolio balance model and sticky price models are estimated and evaluated using u s canadian data for the 1970s nonnested hypothesis tests demonstrate that none are correctly specified the data suggest 1 the exchange rate persistence observed is not fully explained by any of the models 2 the small durbin watson statistics indicate longer lags are required 3 the current account is a useful explanatory variable 4 the portfolio balance model fits the data well but has potentially serious problems measuring the stock of foreign assets this abstract was borrowed from another version of this item

portfolio choice and trading in a large 401 k plan we study nearly 7 000 retirement accounts during the april 1994 august 1998 period several interesting patterns emerge most asset allocations are extreme either 100 percent or zero percent in equities and there is inertia in asset allocations equity allocations are higher for males married investors and for investors with higher earnings and more seniority on the job equity allocations are lower for older investors there is very limited portfolio reshuffling in sharp contrast to discount brokerage accounts daily changes in equity allocations correlate only weakly with same day equity returns and do not correlate with future equity returns

the canadian us dollar exchange rate a test of alternative models for the seventies abstract three basic models of bilateral exchange rate determination are evaluated on the basis of the canadian experience in the 1970s we examine wealth effects and incorporate consistent expectations in the traditional models based on reduced form equations empirical results reject a simple monetary approach and the stickly price asset market model but concur with a version of the stock flow model of exchange rate determination

the allocation of capital between residential and nonresidential uses taxes inflation and capital market constraints we have constructed a simple two sector model of the demand for housing and corporate capital economic growth and an increase in the inflation rate were then simulated with a number of model variants the model and simulation experiments illustrate both the tax bias in favor of housing and the manner in which the increase in inflation between 1965 and 1978 magnified it the existence of capital market constraints offsets the bias against corporate capital but it introduces a sharp inefficient reallocation of housing from less wealthy constrained households to wealthy households who do not have gains on mortgages and are not financially constrained

search costs and adaptive consumers short time delays do not affect choice quality using online price comparison and shopping platforms makes experiencing slow connections lags and waiting times for information an unfortunate reality however little attention has been paid to analyzing the effects of such delayed display of information on product choice behavior this article explores the effect of time delays in a multi attribute choice laboratory experiment by not providing information immediately when requested but after short time delays increasing these waiting times reduced the amount of information looked up but did not affect choice quality higher time delays made decision makers use more deliberate search processes whereas low time delays induced inefficient over searching

economic policies and demand for money evidence from canada this study identifies canadian fiscal and monetary policy regime changes that could influence the services of money it is argued that if these policy regime changes were not incorporated in the estimation of demand for real balances the resulting estimate would be biased and unstable using canadian monthly data for the january 1975 to june 2001 period the paper estimates a standard demand for money m1 function with and without these policy regime changes it was found the demand for money in canada is stable over the short and long run periods when these policy regime changes are incorporated and the estimated coefficients have correct signs

shrouded attributes consumer myopia and information suppression in competitive markets bayesian consumers infer that hidden add on prices e g the cost of ink for a printer are likely to be high prices if consumers are bayesian firms will not shroud information in equilibrium however shrouding may occur in an economy with some myopic or unaware consumers such shrouding creates an inefficiency which firms may have an incentive to eliminate by educating their competitors customers however if add ons have close substitutes a curse of debiasing arises and firms will not be able to profitably debias consumers by unshrouding add ons in equilibrium two kinds of exploitation coexist optimizing firms exploit myopic consumers through marketing schemes that shroud high priced add ons in turn sophisticated consumers exploit these marketing schemes it is not possible to profitably drive away the business of sophisticates it is also not possible to profitably lure either myopes or sophisticates to nonexploitative firms we show that informational shrouding flourishes even in highly competitive markets even in markets with costless advertising and even when the shrouding generates allocational inefficiencies

commitment to pay taxes results from field and laboratory experiments abstract a tax authority s ability to successfully collect taxes depends on its relationship with the taxpayers as well as their commitment to contribute to the common good in this paper we examine the effect of promises on tax compliance aimed at fostering taxpayer commitment first in a field experiment we investigate whether tax compliance changes when taxpayers make a formal promise to pay their taxes on time with compliance rewarded by entry into a lottery for either a financial or nonfinancial in kind reward we then complement this analysis with a laboratory experiment in which we measure the effect of promises in the different compliance domain of tax honesty and contrast the effect of a pure promise to pay with schemes that pair the promise with a reward offer we find that taxpayers with a history of compliance or high scores on tax morale are more likely to make the promise but solely offering the possibility to make a promise does not lead to a change in compliance behavior whether or not compliance improves depends on the type of reward to which the promise is linked in our experimental analyses for example compliance only increases if the reward for promise fulfillment is nonfinancial

costly information acquisition experimental analysis of a boundedly rational model the directed cognition model assumes that agents use partially myopic option value calculations to select their next cognitive operation the current paper tests this model by studying information acquisition in two experiments in the first experiment information acquisition has an explicit financial cost in the second experiment information acquisition is costly because time is scarce the directed cognition model successfully predicts aggregate information acquisition patterns in these experiments when the directed cognition model and the fully rational model make demonstrably different predictions the directed cognition model better matches the laboratory evidence jel d83

learning from experience simply there is substantial academic interest in modeling consumer experiential learning however approximately optimal solutions to forward looking experiential learning problems are complex limiting their behavioral plausibility and empirical feasibility we propose that consumers use cognitively simple heuristic strategies we explore one viable heuristic index strategies and demonstrate that they are intuitive tractable and plausible index strategies are much simpler for consumers to use but provide close to optimal utility they also avoid exponential growth in computational complexity enabling researchers to study learning models in more complex situations well defined index strategies depend on a structural property called indexability we prove the indexability of a canonical forward looking experiential learning model in which consumers learn brand quality while facing random utility shocks following an index strategy consumers develop an index for each brand separately and choose the brand with the highest index using synthetic data we demonstrate that an index strategy achieves nearly optimal utility at substantially lower computational costs using iri data for diapers we find that an index strategy performs as well as an approximately optimal solution and better than myopic learning we extend the analysis to incorporate risk aversion other cognitively simple heuristics heterogeneous foresight and an alternative specification of brands

public sector performance measurement and stakeholder support abstract over the past several decades there has been dramatically increased attention paid to measuring the performance of public sector and nonprofit organizations in the united states and elsewhere recent research has indicated that public sector and nonprofit organizations are responsive to performance measurement in both productive and unproductive ways however it is not yet known how stakeholders respond to this measurement this paper makes use of a unique panel survey dataset of the population of elementary and middle schools in the state of florida to directly investigate this question we exploit the fact that florida changed its school grading system in 2002 and study the degree to which private contributions to schools are responsive to the information contained in school grades we find evidence that school grades can have substantial effects on a school s ability to obtain private contributions we also observe that schools serving different clienteles are treated differently in response to changes in school grades

on the role of heuristics experimental evidence on inflation dynamics we run an experiment where groups of six subjects must set prices in a non stationary macroeconomic environment where prices are complements the exogenous variable a business indicator is common knowledge and prices are flexible disregarding sticky prices or sticky information in a first treatment subjects insignificantly corrected for past errors which implies that history plays a role for determining current prices by reporting the business indicator in a simpler form the second treatment tacitly offered a heuristic for setting prices this option was widely taken bringing about an excess response to the business indicator and a significant deviation from equilibrium even in the long run in a third treatment with staggered pricing we observe that subjects look only one round into the future but not further ahead contrary to theoretical predictions our findings suggest that monetary transmission may be impaired due to what we label sticky reasoning the failure or unwillingness to iteratively delete dominated strategies 2013 elsevier b v all rights reserved

rational choice with status quo bias abstract motivated by the empirical findings concerning the importance of one s current situation on her choice behavior the main objective of this paper is to propose a rational choice theory that allows for the presence of a status quo bias and that incorporates the standard choice theory as a special case we follow a revealed preference approach and obtain two nested models of rational choice that allow phenomena like the status quo bias and the endowment effect and that are applicable in any choice situation to which the standard static choice model applies

a re examination of the monetary model of exchange market pressure canada 1963 1988 in re evaluating the performance of the girton and roper 1977 two country monetary model of exchange market pressure emp for canada estimates are provided for an extended specification that allows for unrestricted dynamics results show the hypothesized negative effect of domestic credit growth on emp to be supported throughout the relevance both of the dynamics and of the hypothesized unitary tradeoff between exchange rate and international reserve movements for bank of canada policy is demonstrated for the sequence of fixed and floating exchange rate regimes contained in the 1963 1 1988 1 sample

a model of focusing in economic choice we present a generally applicable theory of focusing based on the hypothesis that a person focuses more on and hence overweights attributes in which her options dier more our model predicts that the decisionmaker is too prone to choose options with concentrated advantages relative to alternatives but maximizes utility when the advantages and disadvantages of alternatives are equally concentrated in intertemporal choice because the relative concentrations of an option s costs and benets can be dierent from the perspective of a single period and the perspective of the entire choice problem the decisionmaker often exhibits a form of time inconsistency she is present biased when the costs of current misbehavior are distributed over many future dates such as in harmful consumption but future biased when the benet of many

unstable money demand and the monetary model of the exchange rate in this paper the authors investigate the importance for the monetary model of exchange rate determination of j frankel 1979 of allowing unrestricted dynamics and of accounting for shifts in the demand for money due to financial innovation based on estimation and simulation results for the canada u s bilateral exchange rate over the 1970 85 period the aut hors find strong evidence in favor of a generalized approach to dynamic specification but find that the shif t adjustment of official money supply data has only minor implications for the empirical results moreover neither modification is sufficient to generate a monetary model that is well supported by the data

econometric approaches to empirical models of exchange rate determination abstract this paper identifies four principal econometric approaches to the estimation and testing of asset market models of exchange rate determination the traditional static reduced form approach the error correction and co integration dynamic reduced form approaches the simultaneous equations approach and large scale multi equation macroeconometric simulation models each of these econometric approaches is evaluated with respect to its theoretical validity and the comparative properties of the empirical results obtained this leads to the conclusion that although there may be little to choose between the different theoretical exchange rate models there may be grounds for favouring a multi equation simultaneous estimation procedure for this class of models

minding small change among small firms in kenya abstract many micro enterprises in kenya have low productivity we focus on one particular business decision which may indicate low productivity keeping enough change on hand to break larger bills this is a surprisingly large problem our estimates suggest that the average firm loses approximately 5 8 of total profits because they do not have enough change we conducted two experiments to shed light on why this happens surveying firms weekly about lost sales thereby increasing the salience of change and explicitly informing firms about lost sales we find that both interventions significantly altered change management and reduced lost sales this largely rules out many potential explanations such as the risk of theft or the costs of holding change being too high one explanation consistent with firms response to the survey and information on their lost sales is that firms were not perfectly attentive to change management prior to the interventions

on the use of heuristics to approximate competitors private information abstract firms often lack knowledge of the nature of the uncertainty they or their opponents face and use heuristics or approximations to determine their strategy we define and analyze one type of heuristic strategy in which firms choose strategies based on the expectation of their opponents private information rather than the full information about the distribution of that private information we find that in equilibrium the degree to which the heuristic strategy differs from the bayesian strategy depends on 1 the convexity of a firm s marginal profits with respect to their opponents private information and 2 whether firm strategies are complementary or substitutable under certain conditions firms equilibrium profits are greater when all firms use heuristics than when all firms use the full information our results provide insight into incentives firms may have to either facilitate or impede access to industry information

the effects of experience on preferences theory and empirics for environmental public goods this article develops a choice model for environmental public goods which allows for consumers to learn about their preferences through consumption experiences we develop a theoretical model of bayesian updating perform comparative statics over the model and show how the theoretical model can be consistently incorporated into a reduced form econometric model our main findings are that in a random utility model rum discrete choice model a subject s scale should increase and the variability of scale should decrease with experience if subjects are bayesians we then estimate the model using field data regarding preferences for one particular public good water quality we find strong evidence that additional experience increases scale thereby making consumer preferences more predictable from the econometrician s perspective we find supportive but less convincing evidence that experience decreases the variability of scale across subjects

signaling with costly acquisition of signals in this paper we investigate the consequences of introducing a cost to observe the signal in an otherwise standard signaling game beyond identifying equilibria which we contrast with those of a standard signaling game we study their robustness to two important classes of refinements acting through restrictions on out of equilibrium beliefs and through trembles our results suggest that more prominence should be given to the pooling outcome on the minimum signal

the mystery of the multiplying marks a modification of the monetary model fair ray and dwight jaffee methods of estimation for markets in disequilibrium econometrica 40 may 1972 497 514 fair ray and harry kelejian methods of estimation for markets in disequilibrium further study econometrica 42 jan 1974 177 190 goldfeld stephen and richard quandt estimation in a disequilibrium model and the value of information journal of econometrics 3 nov 1975 325 348 hausman jerry the effects of wages taxes and fixed costs on women s labor force participation journal of public economics 14 oct 1980 161 194 mcdonald john and robert moffitt the uses of tobit analysis this review 62 may 1980 318 321 maddala g s and forrest nelson maximum likelihood methods for models of markets in disequilibrium econometrica 42 nov 1974 1013 1030 moffit robert and kenneth kehrer the effect of tax and transfer programs on labor supply the evidence from the income maintenance experiments in ronald ehrenberg ed research in labor economics vol 4 greenwich conn jai press 1981 nelson forrest censored regression models with unobserved stochastic censoring thresholds journal of econometrics 6 nov 1977 309 327 oi walter labor as a quasi fixed factor journal of political economy 70 dec 1962 538 555 rosen harvey and richard quandt estimation of a disequilibrium aggregate labor market this review 60 aug 1978 371 379 tobin james estimation of relationships for limited dependent variables econometrica 26 jan 1958 24 36

the brain as a hierarchical organization based on recent neuroscience evidence we model the brain as a dual system organization subject to three conflicts asymmetric information temporal hori zon and incentive salience under the first and second conflicts we show that the uninformed system imposes a positive link between consumption and labor at every period furthermore decreasing impatience endogenously emerges as a consequence of these two conflicts under the first and third conflicts it becomes optimal to set a consumption cap finally we discuss the behavioral implications of these rules for choice bracketing and expense tracking and for consumption over the life cycle jel dil d74 d82 d87 d91

resource allocation in the brain when an individual performs several tasks simultaneously processing resources must be allocated to dierent brain systems to produce energy for neurons to re following the evidence from neuroscience we model the brain as an organization in which a coordinator allocates limited resources to the brain systems responsible for the dierent tasks systems are privately informed about the amount of resources necessary to perform their task and compete to obtain the resources the coordinator arbitrates the demands while satisfying the resource constraint we show that the optimal mechanism is to impose to each system with privately known needs a cap in resources that depends negatively on the amount of resources requested by the other system this allocation can be implemented using a biologically plausible mechanism finally we provide some implications of our theory i performance can be awless for suciently simple tasks ii the dynamic allocation rule exhibits inertia current allocations are increasing in past needs and iii dierent cognitive tasks are performed by dierent systems only if the tasks are suciently important

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

measures of money and the monetary model of the canadian us dollar exchange rate abstract although the measurement of money is central to an empirical monetary modelof exchange rates existing empirical studies rely on official aggregates as a measure of money this paper uses superlative monetary aggregates in the context of a monetary model to explain the exchange rate between canada and the united states the parameters of the model are estimated using two stage least squares with quarterly data for the period 1972 1985 the paper applies davidson mackinnon tests to establish whether superlative and official monetary aggregates areobservationally equivalent in a monetary model of the canadian u s dollar exchange rate

an empirical investigation into the causes of failure of the monetary model of the exchange rate the purpose of this paper is to attempt to provide measures of the relative importance of the principal causes of the failure of the monetary model of the exchange rate secondly the random walk hypothesis for the exchange rate is tested the methodology employed is new and has wide application elsewhere it involves explicitly modelling the misspecification by time series techniques the results confirm the importance of the breakdown of the ppp assumption but they also show that misspecification of the money market is equally important the results further show that lagged information can also improve upon the random walk model of the exchange rate

consumer inertia choice dependence and learning from experience in a repeated decision problem abstract understanding when and how individuals think about real life problems is a central question in economics this paper studies the role of inertia inattention state dependence and learning the empirical setting is a tariff experiment when optional measured tariffs for local telephone calls were introduced unanticipatedly we find that consumers tend to align their choices of tariff and telephone use levels correctly despite low potential savings mistakes are not permanent as individuals actively engage in tariff switching in order to reduce the monthly cost of telephone service ignoring unobservable heterogeneity and the endogeneity of past choices would have reversed these results

electoral competition with rationally inattentive voters how do voters allocate costly attention to alternative political issues and how does selective ignorance of voters interact with policy design by politicians we address these questions by developing a model of electoral competition with rationally inattentive voters rational inattention amplies the eects of preference intensity because voters pay more attention where stakes are higher the model has many potential applications and those that we discuss in more detail imply that extremist voters are more attentive and inuential public goods are under provided divisive issues receive more attention and less transparent candidates choose more extreme policies endogenous attention can also lead to multiple equilibria explaining how poor voters in developing countries can be politically empowered by welfare programs

why do we lie a practical guide to the dishonesty literature over the last decade a massive body of research has been devoted to uncovering human dishonesty in the present paper we review more than a hundred papers from this literature and provide a comprehensive overview by first listing the existing theoretical frameworks and then covering the common empirical approaches synthesizing the demographic and personal characteristics of those who cheat identifying the behavioural mechanisms found that affect dishonesty and finally we finish by discussing how the empirical evidence fit theory overall the review concludes that many people behave dishonestly but also that it is a highly malleable behavior sensitive to elements such as decision contexts behaviour of others state of mind and depletion the review can be used as an overview of the dishonesty literature or as a guide or work of reference for selected topics of interest

limited attention as a scarce resource in information rich economies this article uses basic facts from the psychology of attention to show how the limited attention of consumers affects economic competition the article determines endogenously whether an economy is information rich or information poor a conventional economic equilibrium results if subjects have spare attention capacity at the positive level the respective impacts of advances in information technology international integration and the media on equilibrium diversity and level of attention seeking activities are shown at the normative level the issues of welfare efficiency and optimal policy interventions are addressed

preference elicitation under oath eliciting sincere preferences for non market goods remain a challenge due to the discrepency between hypothetical and real behavior and false zeros the gap arises because people either overstate hypothetical values or understate real commitments or a combination of both herein we examine whether the traditional real world institution of the solemn oath can improve preference elicitation applying the social psychology theory on the oath as a truth telling commitment device we ask our bidders to swear on their honour to give honest answers prior to participating in an incentive compatible second price auction the oath is an ancillary mechanism to commit bidders to bid sincerely in a second price auction results from our induced valuation testbed treatments suggest that the oath only auctions outperform all our other auctions real and hypothetical in our homegrown valuation treatments eliciting preferences for dolphin protection the oath only design induced people to treat as binding both their experimental budget constraint i e lower values on the high end of the value distribution and participation constraint i e positive values in place of the zero bids used to opt out of auction based on companion treatments we show the oath works through an increase in the willingness to tell the truth due to a strengthening of the intrinsic motivation to do so

a comparison among partial adjustment rational expectations and error correction estimates of the canadian demand for money starting from a dynamic optimization principle the currently most popular approaches to modelling money demand functions are derived the partial adjustment adaptive expectations rational expectations and error correction mechanism formulations are then estimated using a common data set the error correction mechanism equation is found to dominate the others either because their implicit restrictions are rejected rational expectations or by employing the encompassing principle partial adjustment adaptive expectations surprisingly all three forms have similar long run solutions since the short run dynamics differ substantially the results have important implications for the conduct of monetary policy

consumer search behavior and sunk costs abstract this paper presents the results of four economic experiments involving 41 undergraduate students who were assigned the task of searching for the lowest price from a known distribution of prices economic theory predicts that individuals should continue to draw until the expected gain of another search is less than the marginal search cost additionally once individuals have made a draw and then continued they should never return to a price drawn earlier exercise recall both of these predictions are tested in the paper and the results show that behavior is not always consistent with them it appears that individuals are making decisions based on the total return from searching rather than simply the marginal return from another draw

strategic communication with lying costs i study a model of strategic communication between an uninformed receiver and an informed but upwardly biased sender the sender bears a cost of lying or more broadly of misrepresenting his private information the main results show that inflated language naturally arises in this environment where the sender almost always claims to be of a higher type than he would with complete information regardless of the intensity of lying cost there is incomplete separation with some pooling on the highest messages the degree of language inflation and how much information is revealed depend upon the intensity of lying cost the analysis delivers a framework to span a class of cheap talk and verifiable disclosure games unifying the polar predictions they make under large conflicts of interest i use the model to discuss how the degree of manipulability of information can affect the trade off between delegation and communication copyright 2009 wiley blackwell

implications of rational inattention abstract a constraint that actions can depend on observations only through a communication channel with finite shannon capacity is shown to be able to play a role very similar to that of a signal extraction problem or an adjustment cost in standard control problems the resulting theory looks enough like familiar dynamic rational expectations theories to suggest that it might be useful and practical while the implications for policy are different enough to be interesting

strategic pricing with rational inattention to quality this paper studies both theoretically and experimentally the pricing strategy of a rm that faces a consumer who is rationally inattentive to product quality sims 2003 in a standard sequential pricing game rational inattention to quality produces two types of mixed strategy perfect bayesian equilibria one where sellers pool at a low price and buyers are fully inattentive to quality and one where there is semi pooling at a high price and buyers are selectively attentive to quality i characterize these

search and satisficing many everyday decisions are made without full examination of all available options and as a result the best available option may be missed we develop a search theoretic choice experiment to study the impact of incomplete consideration on the quality of choices we find that many decisions can be understood using the satisficing model of herbert simon 1955 most subjects search sequentially stopping when a satisficing level of reservation utility is realized we find that reservation utilities and search order respond systematically to changes in the decision making environment jel d03 d12 d83

attention discrimination theory and field experiments with monitoring information acquisition we link two important ideas attention is scarce and lack of information about an individual drives discrimination in selection decisions our model of allocation of costly attention implies that applicants from negatively stereotyped groups face attention discrimination less attention in highly selective cherry picking markets where more attention helps applicants and more attention in lemon dropping markets where it harms them to test the prediction we integrate tools to monitor information acquisition into correspondence field experiments in both countries we study we find that unfavorable signals minority names or unemployment systematically reduce employers efforts to inspect resumes also consistent with the model in the rental housing market which is much less selective than labor markets we find landlords acquire more information about minority relative to majority applicants we discuss implications of endogenous attention for magnitude and persistence of discrimination in selection decisions returns to human capital and potentially for policy