implications of bid design and willingness to pay distribution for starting point bias in double bounded dichotomous choice contingent valuation surveys we examine starting point bias in double bounded dichotomous choice contingent valuation surveys we investigate 1 the seriousness of the biases for the location and scale parameters of the willingness to pay wtp in the presence of starting point bias 2 whether or not these biases depend on the distribution of wtp and on the bid design and 3 how well a commonly used diagnostic for starting point bias a test of the null that bid set dummies entered in the right hand side of the wtp model are jointly equal to zero performs under various circumstances monte carlo simulations suggest that the effect of ignoring starting point bias depends on the bid design and on the true distribution of wtp a well balanced symmetric bid design may result in very modest biases even when the anchoring mechanism is very strong the power of bid set dummies in detecting starting point bias is low they tend to account for misspecifications in the distribution assumed by the researcher for the latent wtp rather than capturing the presence of starting point bias

expressive vs strategic voters an empirical assessment abstract leading theories of how voters choose between candidates are rooted in two very different paradigms with starkly different behavioral implications exploiting the incentive structure of germany s electoral system i develop a novel set of empirical tests that pit the canonical pivotal voter model against alternative accounts according to which individuals derive expressive utility from supporting their most preferred candidate the results show that neither paradigm can explain the most salient features of the data in addition the evidence suggests that voters cannot be neatly categorized into sincere and strategic types

anchoring in financial decision making evidence from jeopardy abstract this paper analyzes 12 596 daily double wagering decisions of 6064 contestants in the us game show jeopardy we exploit a situation in which a player has to unexpectedly wager on responding correctly to an unknown clue known as a daily double clue we find evidence consistent with the hypothesis of contestants anchoring heavily on the initial dollar value of a clue in wagering this positive relationship remains statistically significant at the one percent level after controlling for other characteristics that may independently affect wagering decisions such as scores clue categories time trends individual jeopardy experience and player fixed effects exploiting within player variation only raising the anchoring amount by 100 translates to an increase of 29 in the wager an alternative explanation of underlying strategic considerations appears unlikely and results are consistent throughout a number of robustness checks overall these findings suggest that anchoring can play a substantial role in financial decision making under pressure

rationality in extensive form games let us adopt the classical point of view that a theory of games is a description of rational behavior consequently equipped with a book entitled theory of games any individual in any strategic situation need only consult the book to make a rational decision one of the questions to address in this context is indeed whether or not strategies other than those provided by backward induction can ever appear in such a book in offering an answer we shall also explore the logical limits within which any theory of games must operate

who is behavioral cognitive ability and anomalous preferences in this paper we ask whether variation in preference anomalies is related to variation in cognitive ability evidence from a new laboratory study of chilean high school students with similar schooling backgrounds shows that small stakes risk aversion and short run discounting are less common among those with higher standardized test scores the relationship with test scores survives controls for parental education and wealth we find some evidence that elementary school gpa is predictive of preferences measured at the end of high school two laboratory interventions provide suggestive evidence of a possible causal impact of cognitive resources on expressed preferences jel j24 d14 c91

professionals play minimax the implications of the minimax theorem are tested using natural data the tests use a unique data set from penalty kicks in professional soccer games in this natural setting experts play a one shot two person zero sum game the results of the tests are remarkably consistent with equilibrium play in every respect i winning probabilities are statistically identical across strategies for players ii players choices are serially independent the tests have substantial power to distinguish equilibrium play from disequilibrium alternatives these results represent the first time that both implications of von neumann s minimax theorem are supported under natural conditions during the last few decades game theory has contributed to a reshaping of important aspects of the methodology of economics and other social sciences in a large part this is because the language concepts and techniques of non cooperative game theory have become central to many areas of the discipline undoubtedly studying the interaction of ideally rational players greatly aids our understanding of the behaviour of real individuals firms and other agents moreover as kreps 1991 remarks studying the former should aim at understanding the latter the point of game theory is to help economists understand and predict what will happen in economic social and political contexts theoretical contributions should thus feed back to empirical analysis however testing the implications of the theory has proven extremely difficult in the literature the primary reason is that many predictions often hinge on properties of the utility functions and the values of the rewards used even when predictions are invariant over classes of preferences data on rewards are seldom available in natural settings moreover there is often great difficulty in determining strategy sets and in measuring individuals choices effort levels and the incentive structures they face as a result even the most fundamental predictions of game theoretical models have not yet been supported empirically in real situations in view of the substantial problems associated with testing theoretical predictions using natural data many authors have been compelled to test them in experimental settings interestingly enough despite the controlled structure of experiments the results of many experiments during the last few decades typically reject the assumption that subjects are playing according to the theoretical implications of equilibrium play for instance a number of experiments have evaluated the empirical validity of von neumann s minimax theory for two person zero sum games a theory that occupies a central position in our understanding of strategic situations the results have been mixed and are often rather negative see for instance brown and rosenthal 1990 rapoport and boebel 1992 camerer 2003 and the references therein

the effect of environmental regulation on optimal plant size and factor shares the method for measuring the effects of environmental regulation on the size distribution of industrial plants and the distribution of factor shares described in this paper focuses on the 20 industries with highest per unit pollution abatement costs and the 20 with the lowest costs the study finds that compliance with environmental laws has not only reduced the number of plants in the affected industries but has placed a greater burden on small rather than on large plants besides redistributing within industry market shares environmental regulation has increased the use of capital relative to labor although the disproportionate burden placed on small plants in the high abatement cost industries may have been unintended it is likely that large firms will be less vocal opponents of environmental regulation than are small firms 22 references 12 tables

are risk aversion and impatience related to cognitive ability is the way that people make risky choices or tradeoffs over time related to cognitive ability this paper investigates whether there is a link between cognitive ability risk aversion and impatience using a representative sample of the population and incentive compatible measures we conduct choice experiments measuring risk aversion and impatience over an annual time horizon for a randomly drawn sample of roughly 1 000 german adults subjects also take part in two different tests of cognitive ability which correspond to sub modules of one of the most widely used iq tests interviews are conducted in subjects own homes we find that lower cognitive ability is associated with greater risk aversion and more pronounced impatience these relationships are significant and robust to controlling for personal characteristics educational attainment income and measures of credit constraints we perform a series of additional robustness checks which help rule out other possible confounds

one swallow doesn t make a summer new evidence on anchoring effects some researchers have argued that anchoring in economic valuations casts doubt on the assumption of consistent and stable preferences we present new evidence that explores the strength of certain anchoring results we then present a theoretical framework that provides insights into why we should be cautious of initial empirical findings in general the model importantly highlights that the rate of false positives depends not only on the observed significance level but also on statistical power research priors and the number of scholars exploring the question importantly a few independent replications dramatically increase the chances that the original finding is true

competing for loyalty the dynamics of rallying support abstract we consider a class of dynamic collective action problems in which either a single principal or two competing principals vie for the support of members of a group we focus on the dynamic problem that emerges when agents negotiate and commit their support to principals sequentially we show that competition reduces agents welfare with public goods or if and only if there are positive externalities on uncommitted agents and increases agents welfare with public bads we apply the model to the study of corporate takeovers vote buying and exclusive deals jel d42 d62 d72 d82 g34 h41

equilibrium play and adaptive learning in a three person centipede game the two person centipede game is one of the most celebrated paradoxes of backward induction in complete information extensive form games an experimental investigation of a three person centipede game shows that the paradoxical results are strongly affected by the size of the stakes when the number of players in the game is increased from two to three and the game is played for unusually high stakes with group composition being randomly changed from trial to trial the paradox is considerably weakened as players approach equilibrium play with multiple iterations of the stage game when the game is played with low stakes there is no evidence for equilibrium play or learning across iterations of the stage game an adaptive learning model that assumes updating of the individual probabilities of choice outperforms alternative static and dynamic models in accounting for the major results observed in the high stake experiment

field experiments on the anchoring of economic valuations i introduction take the last three digits of your social security number ssn turn those numbers into a dollar value i e if your numbers are 462 then they provide a value of 462 consider whether you would be willing to pay that dollar amount for a first edition of j r r tolkien s the hobbit now how much would you actually pay for a first edition original copy a stylized result from laboratory experiments in economics and psychology is that the answer to the latter valuation question can be strongly influenced by the dollar amount computed at the start 1 critics of neoclassical theory have argued that the influence of uninformative anchors such as the transformed ssn refutes the notion that decision makers preferences are predefined consistent and stable instead they are constructed during the process of choice bettman luce and payne 1998 hoeffler and ariely 1999 slovic 1995 a natural conclusion one might draw from studies of anchoring is that decisions may be influenced by irrelevant circumstances and optimization principles do not apply the laboratory evidence consonant with anchoring effects is considerable tversky and kahneman 1974 make a seminal contribution implementing a protocol similar to the one described above to examine general knowledge questions 2 furnham and boo 2011 provide a recent review of the literature and identify more than 25 studies that report significant anchoring effects substantive areas investigated include general knowledge questions epley and gilovich 2006 tversky and kahneman 1974 probability estimates wright and anderson 1989 legal judgments englich and mussweiler 2001 forecasting switzer and sniezek 1991 and valuation and purchasing decisions ariely loewenstein and prelec 2003 taken together the results suggest strong effects from anchoring protocols even in areas where subjects have significant experience yet the importance of anchoring for economic outcomes remains an open question one reason is that research goals and methods differ across the disciplines of psychology and economics croson 2005 hertwig and ortmann 2001 plott 1996 3 fumham and boo 2011 note that drawing generalizable conclusions from the existing anchoring studies is difficult as many involve undergraduate students engaged with topics they are unlikely to encounter in field settings their observation is consistent with the criticism of the ecological validity of many studies made by gerd gigerenzer and colleauges gigerenzer et al 2008 discussed in our footnote 2 while the results of these studies may help distinguish among competing causal claims about the anchoring process they are less relevant for understanding the potential for anchors to affect market equilibria further many of the studies lack meaningful incentives and we believe that economists are justifiably circumspect about results that may merely reflect mistakes made by unmotivated subjects consistent with this view is the idea that with appropriate incentives and feedback anchoring effects should diminish and behavior more closely match predictions from neoclassical models 4 recent attempts to examine the relevance of anchoring for economic outcomes closely follow ariely loewenstein and prelec 2003 alp hereafter who find statistically and economically significant effects of anchors on willingness to pay wtp for common consumer goods and on willingness to accept wta for unpleasant sounds and tastes bergman et al 2010 and fudenberg levine and maniadis 2012 flm hereafter replicate the consumer goods portion of the alp study with mixed results bergman et al 2010 find significant anchoring results consistent with the earlier work although the magnitude of the effect is smaller implementing an auxiliary protocol they find also that anchoring effects diminish with cognitive ability flm 2012 attempt to anchor both wtp and wta and find no evidence of anchoring in the wtp treatment

anchoring and cognitive ability abstract we find that the actual willingness to pay for various consumer goods can be manipulated by an uninformative anchor replicating ariely et al 2003 we furthermore demonstrate that the anchoring effect decreases but does not vanish with higher cognitive ability

not your average job measuring farm labor in tanzania a good understanding of the constraints on agricultural growth in africa relies on the accurate measurement of smallholder labor yet serious weaknesses in these statistics persist the extent of bias in smallholder labor data is examined by conducting a randomized survey experiment among farming households in rural tanzania agricultural labor estimates obtained through weekly surveys are compared with the results of reporting in a single end of season recall survey the findings show strong evidence of recall bias people in traditional recall style modules report working up to four times as many hours per person plot relative to those reporting labor on a weekly basis if hours are aggregated to the household level however this discrepancy disappears a factor driven by the underreporting by recall households of people and plots active in agricultural work the evidence suggests that these competing forms of recall bias are driven not only by failures in memory but also by the mental burdens of reporting on highly variable agricultural work patterns to provide a typical estimate all things equal studies suffering from this bias would understate agricultural labor productivity

vote buying general elections we examine the consequences of vote buying assuming this practice were allowed and free of stigma two parties compete in a binary election and may purchase votes in a sequential bidding game via up front binding payments and or campaign promises platforms that are contingent on the outcome of the election we analyze the role of the parties and voters preferences in determining the winner and the payments to voters

neoclassical theory versus prospect theory evidence from the marketplace several experimental studies have provided evidence that suggest indifference curves have a kink around the current endowment level these results which clearly contradict closely held economic doctrines have led some influential commentators to call for an entirely new economic paradigm to displace conventional neoclassical theory e g prospect theory which invokes psychological effects this paper pits neoclassical theory against prospect theory by investigating data drawn from more than 375 subjects actively participating in a well functioning marketplace the pattern of results suggests that prospect theory adequately organizes behavior among inexperienced consumers but consumers with intense market experience behave largely in accordance with neoclassical predictions moreover the data are consistent with the notion that consumers learn to overcome the endowment effect in situations beyond specific problems they have previously encountered this transference of behavior across domains has important implications in both a positive and normative sense

backward induction in the wild evidence from sequential voting in the us senate in the us senate roll calls are held in alphabetical order we document that senators early in the order are less likely to vote with the majority of their own party than those whose last name places them at the end of the alphabet to speak to the mechanism behind this result we develop a simple model of sequential voting in which forward looking senators rely on backward induction in order to free ride on their colleagues estimating our model structurally we find that this form of strategic behavior is an important part of equilibrium play we also consider but ultimately dismiss alternative explanations related to learning about common values and vote buying

the effect of cognitive load on economic decision making a survey and new experiments abstract psychologists and economists have examined the effect of cognitive load in a variety of situations from risk taking to snack choice we review previous experiments that have directly manipulated cognitive load and summarize their findings we report the results of two new experiments where participants engage in a digit memorization task while simultaneously performing a variety of economic tasks including 1 choices involving risk 2 choices involving intertemporal substitution 3 choices with anchoring effects 4 choices over healthy and unhealthy snacks and 5 math problems we find that higher cognitive load reduces numeracy as measured by performance in math problems moreover within subject analysis indicates that cognitive load leads to more risk averse behavior more impatience over money and nominally more likelihood to anchor we do not find any evidence that cognitive load increases impatience over consumption goods or unhealthy snack choices exploiting the panel nature of our data set we find that those individuals who are most sensitive to cognitive load as measured by a large drop in their own math performance across 1 and 8 digit memorization treatments are driving much of the effect

bandwagons and momentum in sequential voting in this paper i show that an equilibrium exists to the sequential voting game in which a bandwagon begins with probability 1 these bandwagons are driven by a combination of beliefs and the desire of voters to vote for the winning candidate significantly in this equilibrium the pivot probability for each voter is non zero even in an infinite population consequently the bandwagons do not always start after one or at most two favourable decisions as do economic cascades and varying levels of informative voting are observed consistent with observations from sequential voting in u s presidential primaries further voters are exposed to counterintuitive incentives referred to as buyers remorse that have been attributed to real primary voters i also derive equilibrium behaviour in this environment when voting is simultaneous and compare the quality of information aggregation within each mechanism i relate the conclusions to u s presidential primaries and find they are consistent with a common conclusion about the front loading of the primary process that in tight elections with no front runner simultaneous voting is preferred whereas in lopsided elections sequential voting is preferred the superior performance of sequential voting in lopsided races is precisely because bandwagons occur copyright 2007 wiley blackwell

higher cognitive ability is associated with lower entries in a p beauty contest abstract beauty contests are well studied dominance solvable games that generate two interesting results first most behavior does not conform to the unique nash equilibrium second there is considerable unexplained heterogeneity in behavior in this work we explore the relationship between beauty contest behavior and cognitive ability we find that subjects with high cognitive ability exhibit behavior that is closer to the nash equilibrium

when collective ignorance is bliss theory and experiment on voting for learning abstract when do groups and societies choose to be uninformed we study a committee that needs to vote on a reform which will give every member a private state dependent payoff the committee can vote to learn the state at no cost we show that the committee votes not to learn the state whenever independent voters are more divided than partisans this implies that groups with conflicting preferences tend to seek less information a laboratory experiment shows that committees are substantially more likely to vote against acquiring information when the theory predicts them to do so we also observe deviations from theory that are largely explained by cognitive limitations at the same time subjects with more experience or with greater strategic competence are more likely to vote in line with the theory providing evidence for external validity of the model

a theory of competition among pressure groups for political influence this paper presents a theory of competition among pressure groups for political influence political equilibrium depends on the efficiency of each group in producing pressure the effect of additional pressure on their influence the number of persons in different groups and the deadweight cost of taxes and subsidies an increase in deadweight costs discourages pressure by subsidized groups and encourages pressure by taxpayers this analysis unifies the view that governments correct market failures with the view that they favor the politically powerful both are produced by the competition for political favors

sequential sales learning and cascades when ipo shares are sold sequentially later potential investors can learn from the purchasing decisions of earlier investors this can lead rapidly to cascades in which subsequent investors optimally ignore their private information and imitate earlier investors although rationing in this situation gives rise to a winner s curse it is irrelevant the model predicts that 1 offerings succeed or fail rapidly 2 demand can be so elastic that even risk neutral issuers underprice to completely avoid failure 3 issuers with good inside information can price their shares so high that they sometimes fail 4 an underwriter may want to reduce the communication among investors by spreading the selling effort over a more segmented market consider a scenario in which an issuer is selling a new security of uncertain value for example an ipo initial public offering of stock or high yield debt through an underwriter the s e c has banned variable price sales while the value of this new security is highly uncertain to individual market participants investors hold perfectly accurate information when aggregated moreover there are many potential investors and a small number of these investors can jointly determine the value of the firm or its project with high precision it would seem that in this scenario underpriced offerings would succeed and overpriced offerings would fail nevertheless this paper shows that if the distribution channels of invest ment banks are limited underpriced offerings can fail and overpriced offer ings can succeed with limited distribution channels it takes the under writer time to approach interested investors therefore later investors can observe how well an offering has sold to date or at least how successful it has sold relative to offerings previously undertaken by this underwriter

cognitive ability and bidding behavior in second price auctions an experimental study behavioral biases are more pronounced for individuals with lower cognitive abilities this paper examines what connection if any there is between cognitive ability and bidding strategy in second price auctions despite truthful revelation being a weakly dominant strategy previous experiments have consistently observed overbidding which makes use of such auctions for inferring homegrown value problematic examining the effect of cognitive ability is important as it may help identify when one can reliably recover values from bids the results indicate that more cognitively able subjects behave in closer accordance with theory and that cognitive ability partially explains heterogeneity in bidding behavior

coherent arbitrariness stable demand curves without stable preferences economic theories of valuation generally assume that prices of commodities and assets are derived from underlying fundamental values for example in finance theory asset prices are believed to reflect the market estimate of the discounted present value of the asset s payoff stream in labor theory the supply of labor is established by the tradeoff between the desire for consumption and the displeasure of work finally and most importantly for this chapter consumer microeconomics assumes that the demand curves for consumer products chocolates cds movies vacations drugs and so forth can be ultimately traced to the valuation of pleasures that consumers anticipate receiving from these products because it is difficult as a rule to measure fundamental values directly empirical tests of economic theory typically examine whether the effects of changes in circumstances on valuations are consistent with theoretical prediction for example whether labor supply responds appropriately to a change in the wage rate whether compensated demand curves for commodities are downward sloping or whether stock prices respond in the predicted way to share repurchases however such comparative static relationships are a necessary but not sufficient condition for fundamental valuation e g summers 1986 becker 1962 was perhaps the first to make this point explicitly when he observed that consumers choosing commodity bundles randomly from their budget set would nevertheless produce downward sloping demand curves

politics of environmental law political ideology elitism or urban rural interests this paper examines a number of demographic aspects in congressional districts and states that played important roles in a series of congressional votes on environmental issues in 2000 these characteristics include urbanization or population density education income race and employment our findings are mixed while we find some evidence at least in senate votes that population density is a positive predictor of pro environment votes we also find that things commensurate with the environmental kuznets curve such as income education and lifestyle also play an important role in environmental voting