the causes of preference reversal observed preference reversal cannot be adequately explained by violations of independence the reduction axiom or transitivity the primary cause of preference reversal is the failure of procedure invariance especially the overpricing of low probability high payoff bets this result violates regret theory and generalized nonindependent utility models preference reversal and a new reversal involving time preferences are explained by scale compatibility which implies that payoffs are weighted more heavily in pricing than in choice copyright 1990 by american economic association

the ant and the grasshopper understanding personal saving orientation of consumers a low savings rate is a persistent social issue with significant present and future ramifications as an alternative to conceptualizing saving money as goal directed behavior the present research examines the chronic tendencies of people to save money in a consistent and sustained manner through a personal saving orientation pso drawing upon theorizing on action control and research on forming and maintaining habits the pso emphasizes consistent sustainable saving activities and incorporating them into one s lifestyle in a set of nine studies the pso scale is developed and its nomological test retest discriminant and predictive validities are established the results also show that the pso moderates the relationship between consumers financial knowledge and their accumulated savings additionally low pso consumers are responsive to an intervention to help them save money the pso offers an effective method for understanding differences between consumers in their financial decision making and behaviors and it can be used as a guide to encourage consistent and sustained saving practices

labor market regulation and the winner s curse i introduction in march 1992 the government of british columbia b c canada introduced the skill development and fair wage policy sdfwp which mandated the payment of fair wages on provincial public construction projects and promulgated the wage scales for construction crafts in 1994 sdfwp was enacted as legislation similar laws have been enacted in england and the united states in the past and as allen s 1983 survey shows their impact is a subject of controversy opponents argue that regulated wages distort the labor market reduce competition and increase construction costs proponents of the law on the other hand not only emphasize its long term positive effects on the living and working conditions of workers training and the consequent productivity increases but also claim that the alleged inflationary effect is counterbalanced by the improved labor and product quality in this paper i focus on another consequence of wage regulation namely its impact on bidding for public construction contracts i propose that the wage regulation will affect the construction market not only by changing the costs and quality of inputs but also through the transformation of the nature of the uncertainty that the contractors face during the bidding process the auction theory predicts that the optimal bid is responsive to the type of uncertainty under the so called common values cv model bidders face some common source of uncertainty regarding the construction cost and the winner is prone to underestimate the true cost rational and experienced bidders avoid this winner s curse by adding a surcharge to their estimated cost as uncertainty assumes a less collective and more private nature however the winner s curse becomes less of a problem and the rational bidder does not need to resort to the additional surcharge as a protection from underbidding the sdfwp may result in such a transformation in the bidding environment by reducing the uncertainty over labor costs that are common to all nonunion contractors elimination of the surcharge in turn may even offset the possibly higher labor cost in this paper i will test indirectly the hypothesis that the sdfwp influenced the bidding environment in b c in this fashion under the working assumption that contractors follow optimal rules in determining bids for this purpose i will use data from 54 public school construction projects tendered between 1989 and 1995 and compare the pre and post sdfwp unit bid prices the paper is organized as follows in section ii i discuss the relevant auction literature and the hypotheses i state the main hypotheses of the paper concerning the sdfwp and bidding behavior in section iii section iv describes the data an empirical model of bid price determination is presented and estimated in sections v vi and vii the final section concludes ii bidding and the winner s curse bidders for public school construction projects in b c submit sealed bids at a specified date and the lowest bidder wins the contract 1 many of the early sealed bid first price optimal bidding models presented in economics civil engineering and operations research literatures follow friedman 1956 according to these models bidders are risk neutral non colluding expected profit maximizers competing over a single project friedman suggests that the probability of being the lowest competitor is equal to the product of the probabilities of underbidding each competitor probability distributions of the competitors bids are to be obtained from the data on previous tenders this approach lays bare critical elements in competitive bidding first the contractor faces a trade off between profitability and the probability of winning the contract the bid must be high enough to yield a positive profit and low enough to win over other bids second superior cost efficiency enables the contractor to change the parameters of this trade off in his or her favor

number of bids number of bidders and bidding behavior in outer continental shelf oil lease auction markets abstract theoretical models of auction bidding markets typically treat number of bids and number of bidders as equivalent measures when joint bidding opportunities exist this assumption will often not hold in cases such as offshore oil auctions joint bidding is an extremely common occurrence our analysis of these auctions suggests that the actual number of bidding participants is more closely related with variables of interest winning bids average bid per acre etc than is the simple number of bids we argue that analyses such as that presented here are important in developing theoretical models that are useful in explaining or predicting actual bidding auction outcomes

financial illiteracy and pension contributions a field experiment on compound interest in china i conduct a field experiment to study the relationship between peoples misunderstanding of compound interest and their pension contributions in rural china i find that explaining the concept of compound interest to subjects increased pension contributions by roughly 40 the treatment effect is larger for those who underestimate compound interest than for those who overestimate compound interest moreover financial education enables households to partially correct their misunderstanding of compound interest i structurally estimate the level of misunderstanding of compound interest and conduct a counterfactual welfare analysis lifetime utility increases by about 10 if subjects misunderstanding of compound interest is eliminated authors have furnished an internet appendix which is available on the oxford university press web site next to the link to the final published paper online

quantitative easing and the uk stock market does the bank of england information dissemination strategy matter we use intraday aggregate stock market data and an event study framework to assess the uk s equity market reaction to the unexpected element of the bank of england monetary policy committee s mpc asset purchase announcements for the 2009 2017 period we assess the reactions of equity returns and their volatility over various time frames both preceding and following the mpc announcements our results show that the uk unconventional monetary policy shocks have a significant impact on domestic equity returns and volatilities the strength of this impact depends on the bank s information dissemination through inflation reports and the publication of the mpc s voting records jel g14 e44 e52

the boundaries of loss aversion abstract in this article the authors propose some psychological principles to describe the boundaries of loss aversion a key idea is that exchange goods that are given up as intended do not exhibit loss aversion for example the authors propose that money given up in purchases is not generally subject to loss aversion the results of several experiments provide preliminary support for the hypotheses the authors find that consistent with prospect theory loss aversion provides a complete account of risk aversion for risks with equal probability to win or lose the authors propose boundaries for this result and suggest further tests of the model

productivity metrics and consumers misunderstanding of time savings abstractthe marketplace is replete with productivity metrics that put units of output in the numerator and one unit of time in the denominator e g megabits per second mbps to measure download speed in this article three studies examine how productivity metrics influence consumer decision making many consumers have incorrect intuitions about the impact of productivity increases on time savings they do not sufficiently realize that productivity increases at the high end of the productivity range e g from 40 to 50 mbps imply smaller time savings than productivity increases at the low end of the productivity range e g from 10 to 20 mbps consequently the availability of productivity metrics increases willingness to pay for products and services that offer higher productivity levels this tendency is smaller when consumers receive additional information about time savings through product experience or through metrics that are linearly related to time savings consumers intuitions about time

the price effects of increased competition in auction markets bidding theory predicts low er selling winning bids higher buying winning bids as numbers of bidders incre ase alternative versions predict that winning bids fall rise with the second order statistic the maximum order statistic or 1 n the authors test these pre dictions using data on underwriters spreads on tax exempt bonds offshore oil t racts and national forest timber they estimate winning bids using general vari ables for the product and dummies for 1 2 11 bidders in all cases mor e bidders meansignificantly lower selling winning bids the expected maximum order statistic fits better than either the second order statistic or1 n in te n out of twelve cases copyright 1987 by mit press

mental accounting and changes in price the frame dependence of reference dependence mental accounting principles for multiple events were replicated and then extended to pricing situations that were designed to moderate these principles if reference dependence is proportional i e if consumers evaluate events in terms of proportional deviations from reference states rather than raw deviations prices were stated with or without popular percentage based pricing frames such as 33 off mental accounting principles generally prevailed in the absence of percentage based frames however percentage based frames altered two principles and increased tendencies toward the others the findings demonstrate that mental accounting principles price perception and reference dependence are sensitive to the ways in which deviations from reference states are framed

the contractors game we develop a symmetric information auction model of multiproject contracting with costly bidding and increasing marginal performance costs when there are many potential contractors or only one job there is a zero expected profit symmetric equilibrium in mixed strategies the winning bid at this equilibrium tends to rise perversely with the number of contractors when there are only two potential bidders and either two or three jobs multiple bids of a contractor at equilibrium are negatively correlated with each other the resulting equilibrium outcome tends to divide the market between the contractors in a manner that suggests anticompetitive behavior despite the absence of any collusion

anomalies in intertemporal choice evidence and an interpretation research on decision making under uncertainly has been strongly influenced by the documentation of numerous expected utility eu anomalies behaviors that violate the expected utility axioms the relative lack of progress on the closely related topic of intertemporal choice is partly due to the absence of an analogous set of discounted utility du anomalies we enumerate a set of du anomalies analogous to the eu anomalies and propose a model that accounts for the anomalies as well as other intertemporal choice phenomena incompatible with du we discuss implications for savings behavior estimation of discount rates and choice framing effects

hidden skewness on the difficulty of multiplicative compounding under random shocks multiplicative growth processes that are subject to random shocks often have an asymmetric distribution of outcomes in a series of incentivized laboratory experiments we show that a large majority of participants either strongly underestimate the asymmetry or ignore it completely participants misperceive the spread of the outcome distribution to be too narrowband and they estimate the median and the mode to lie too close to the center of the distribution failing to account for the compound nature of average growth the observed biases are measured irrespective to risk preferences and they appear under a variety of conditions the biases are largely consistent with a behavioral model in which geometric growth is confused with linear growth this confusion is a possible driver of investors difficulties with real world financial products like leveraged exchange traded funds and retirement savings plans data and the online appendix are available at https doi org 10 1287 mnsc 2016 2618 this paper was

in search of the winner s curse earlier papers on the winner s curse have provided theoretical arguments that winning bidders in an auction will incur ex post losses even when all bidders use reasonable ex ante bidding strategies this paper demonstrates that these arguments are erroneous optimal ex ante bidders will never suffer from a winner s curse in an auction where only the winning bid is announced furthermore such bidders will on the average not suffer from a winner s curse in an auction where all bids are announced thus if a winner s curse is a behavioral reality then bidders are not generally using ex ante optimal strategies

the effect of shill bidding upon prices experimental evidence this paper explores through a series of experiments the effect of shill bidding upon revenues and prices in auctions we study the practice of shill bidding in a common value framework our findings are consistent with the prediction that if bidders are aware of the possibility of seller participation in an auction profits will be reduced on average we also study factors that affect bidder and seller participation decisions shill bidding can alleviate the problem of the winner s curse by lowering the price and it can thus provide benefits to bidders

the effect of myopia and loss aversion on risk taking an experimental test myopic loss aversion is the combination of a greater sensitivity to losses than to gains and a tendency to evaluate outcomes frequently two implications of myopic loss aversion are tested experimentally 1 investors who display myopic loss aversion will be more willing to accept risks if they evaluate their investments less often 2 if all payoffs are increased enough to eliminate losses investors will accept more risk in a task in which investors learn from experience both predictions are supported the investors who got the most frequent feedback and thus the most information took the least risk and earned the least money language en

what will my account really be worth experimental evidence on how retirement income projections affect saving abstract many investment companies have begun providing their defined contribution pension participants with individualized retirement income projections the u s congress is currently considering whether to require them all to do so evidence on the potential impact is scant though a large body of economic research suggests that individuals are not currently making optimal retirement saving decisions through a field experiment we measure how provision of retirement income projections along with enrollment information affects individuals contributions to employer sponsored retirement accounts we find that the intervention boosted annual contributions to employer retirement accounts by 85 equivalent to 3 6 of the average contribution level or 0 15 of average salary relative to those who received no intervention in addition randomly assigned assumptions regarding retirement age investment returns and hypothetical contribution amounts were used to generate the projections and were found to have significant impacts on saving behavior this finding suggests that care is warranted in the design and communication of projections

railroads competition the santa fe southern pacific merger proposal in september of 1983 the santa fe and southern pacific railroads announced their long rumored long negotiated plan to merge this merger would combine two primarily parallel operations along the southern corridor of southwestern united states the merger was opposed by the antitrust division of the justice department and was turned down by the interstate commerce commission this paper uses the framework provided by the u s department of justice merger guidelines and more recent data to analyze the competitive implications of the merger the author finds that a serious loss of competition would likely have followed from the merger resulting in large gross deadweight losses and much larger transfers from shippers to the merging railroads his analysis demonstrates the critical importance of three factors in evaluating the impact of a merger such as this one a careful location and commodity specific analysis of the loci of likely competitive harm an unbiased estimate of those operating savings promised by the merger which could not be obtained through means less anticompetitive and a careful judgment as to the importance or lack of importance of transfers in the calculation of welfare losses thus an overall welfare calculus requires not only an accurate estimate of the efficiencies resulting from the merger but also a judgment as to the welfare relevance of wealth transfers

alternative common value auction procedures revenue comparisons with free entry the logic of revenue comparisons for different types of common value auctions is substantially altered if the number of participants rather than being fixed responds endogenously to the expected profitability from participating in a thoroughly symmetric model a seller may prefer that competition be indirect an auction procedure in which fewer participants are needed to drive the expected profitability from participating down to the level obtainable in other auctions in the economy can attain higher expected revenue if a sale is sufficiently likely this insight allows a complete revenue ranking of standard auction procedures with endogenous entry

empirical testing of auction theory given the state of affairs in auction theory there is at least one model for instance to support any position one would care to take concerning the revenue of sealed bid vs open auctions it should not come as a surprise that a fair amount of empirical work in auctions is underway this paper reports the results of some recently completed research i first discuss papers in which the predictions being tested derive directly from the pure theory of auctions and then papers in which the predictions arise out of an application of auction theory to a related institution

tobin s imperfect asset substitution in optimizing general equilibrium in this paper we present a dynamic optimizing model that allows explicitly for imperfect substitutability between different financial assets this is specified in a manner which captures tobin s 1969 view that an expansion of one asset s supply affects both the yield on that asset and the spread or risk premium between returns on that asset and alternative assets our estimates of this model on u s data confirm that some of the observed deviations of long term rates from the expectations theory of the term structure can be traced to movements in the relative stocks of financial assets the richer aggregate demand and asset specifications imply that there exists an additional channel of monetary policy our results suggest that central bank operations exercise a modest influence on the relative prices of alternative financial securities and so exert an extra effect on long term yields and aggregate demand separate from their effect on the expected path of short term rates

education and saving the long term effects of high school financial curriculum mandates abstract over the last 40 years a majority of states have adopted consumer education policies and a sizable minority have mandated that high school students receive instruction on topics related to household financial decision making in this paper we attempt to determine whether these mandates have had any effect on subsequent decisions we exploit the variation in requirements both across states and over time to identify the effects of interest the evidence indicates that mandates have raised both exposure to financial curricula and subsequent asset accumulation once exposed students reached adulthood the estimated effects are gradual probably due to implementation lags

potential competition and possible collusion in forest service timber auctions i introduction potential entrants to an imperfectly competitive market in theory limit the ability of existing firms to charge high prices this claim has rarely been tested due mainly to the problems of identifying potential entrants and determining whether established firms perceive them as future competition in previous work neal 1987 finds option bid ask spreads lower when they are eligible for multiple listing kuhlman and johnson 1983 find winning highway construction bids insignificantly related to the number of firms buying plans for the particular project and hurdle et al 1989 show that performance in the airline industry is affected by the number of potential entrants not deterred by economies of scale or scope this paper determines whether potential competition influenced winning bids in forest service oral and sealed bid timber auctions held during 1977 prior to 1977 oral bidding was the dominant method of selling timber in the pacific northwest the national forest management act of 1976 required that sealed bidding be used on all sales with exceptions made only by the secretary of agriculture the sealed bidding requirement was overturned in 1978 after firms in communities dependent upon forest service timber complained that sealed bidding resulted in greater uncertainty in obtaining steady timber supplies 1 firms pay the government for the rights to harvest timber in forest service timber auctions and the highest bid wins bidding theory predicts that greater competition should result in higher winning bids 2 the relevant measure of competition in an oral auction is the actual number of competitive bidders participants in a sealed bid auction however should base their bids on the potential number of competitors timber is costly to haul and timber transportation distances from the sale site to the closest mill of potential competitors are used to define two measures of potential competition the first measure is a simple count of the number of firms whose closest mill lies within the geographical market for forest service timber auctions and is termed potential competition the second results from a probit analysis relating auction participation to hauling distance and is called expected competition the results show that these measures are as expected considerably more important in explaining winning sealed bids however actual competition explains winning bids better than either potential or expected competition under both oral and sealed bidding in addition contrary to expectations increases in hauling distances result in higher winning bids when sealed bidding is used collusion in sealed bid auctions and preclusive bidding a type of collusion in oral auctions are explanations for both of these results the possibility of collusion in sealed bid auctions is supported by an index based on stigler s 1964 theory of oligopoly and feinstein block and nold s 1985 research on bid rigging in highway construction auctions representing the likelihood that a given auction was rigged mead 1966 was among the first to discuss the possibility of preclusive bidding in oral auctions preclusive bidding occurs when firms close to a sale site bid above levels which are profitable to firms farther from the site given that oral bidding entails greater participation costs participants must be present preclusive bidding or the threat of preclusive bidding deters outsider firms from bidding in future oral auctions firms close to the site benefit from the decreased competition and may win at a lower price oral and sealed bid comparisons of winning bid variances overbids and numbers of bidders support the explanation of preclusive bidding in oral auctions public policy should be concerned with obtaining the highest possible value for public timber and ensuring that it is awarded efficiently to the firm having the highest timber value

pricing dynamics in the pharmaceutical industry pricing behaviour has traditionally been approached from the concept of long term static equilibrium this paper argues that this approach is inappropriate at least with respect to the pharmaceutical market because new innovation and patent expiry lead to a continually changing environment a theoretical analysis argues that price change will depend on the age of the therapeutic class the degree of brand loyalty the extent to which it is sold over the counter rather than on prescription and measures of competition the empirical results based on an analysis of the leading twenty five therapeutic class of pharmaceuticals in the usa the uk west germany and france over the period 1981 1988 tends to support the theoretical conclusions although it would appear that government controls in the uk are distorting profit maximizing behaviour more than in the other three countries

decision making over time and under uncertainty a common approach this paper considers a number of parallels between risky and intertemporal choice we begin by demonstrating a one to one correspondence between the behavioral violations of the respective normative theories for the two domains i e expected utility and discounted utility models we argue that such violations or preference reversals are broadly consistent with three propositions about the weight that an attribute receives in both types of multiattribute choice specifically it appears that 1 if we add a constant to all values of an attribute then that attribute becomes less important 2 if we proportionately increase all values of an attribute or if we change the sign of an attribute from positive to negative then that attribute becomes more important the generality of these propositions as well as the constraints they would impose on separable representations of multiattribute preferences is discussed

frames of mind in intertemporal choice recent research has demonstrated that choices between gambles are systematically influenced by the way they are expressed kahneman and tversky s prospect theory kahneman d a tversky 1979 prospect theory an analysis of decision under risk econometrica472 363 391 explains many of these framing effects as shifts in the point of reference from which prospects are evaluated this paper demonstrates the applicability of the reference point concept to intertemporal choice three experiments demonstrate that when people choose between immediate and delayed consumption the reference point used to evaluate alternatives can significantly influence choice the first study elicited relative preference for immediate and delayed consumption using three methods each of which differently framed choices between alternatives offering identical end state consumption the conventional discounted utility model predicts that the three methods of elicitation should yield similar estimates of time preference but preferences were found to differ in accordance with a reference point model the second and third studies extend and replicate the results from the first the third using real rather than hypothetical choices

the time vs money effect shifting product attitudes and decisions through personal connection the results of five field and laboratory experiments reveal a time versus money effect whereby activating time vs money leads to a favorable shift in product attitudes and decisions because time increases focus on product experience activating time vs money augments one s personal connection with the product thereby boosting attitudes and decisions however because money increases the focus on product possession the reverse effect can occur in cases where merely owning the product reflects the self i e for prestige possessions or for highly materialistic consumers the time versus money effect proves robust across implicit and explicit methods of construct activation

two moment decision models and expected utility maximization two moment decision models are consistent with expected utility maximization only if the choice set or the agent s preferences are restricted this paper identifies a restriction which is sufficient to ensure this consistency and confirms that it holds in many economic models the implications for economic analysis are then derived two different approaches to representing an agent s preferences over strategies yielding random payoffs are in wide use under the mean standard deviation ms approach the agent is assumed to rank the alternatives according to the value of some function defined over the first two moments of the random payoff while the expected utility eu criterion assumes that the expected value of some utility function defined over payoffs is used instead the fact that there are these two competing approaches has generated a considerable literature some authors are concerned with the advantages and disadvantages of each while others deal with conditions under which the potentially different approaches would yield the same results or at least approximately so space does not

the winner s curse and bidder competition in acquisitions evidence from failed bank auctions this study examines the effect of bidder competition in acquisitions we use predictions from auction theory to test whether acquirers of failed banks overpay the winner s curse when bidding in fdic sealed bid purchase and assumption p a transactions auctions the empirical results indicate that winning bids tend to increase as the number of competitors increases as predicted by theory we also find that bid levels of all bidders increase with increased competition which is consistent with bidders failing to adjust for the winner s curse in a common value auction setting however additional tests using winning bids only are consistent with both a common value and a private values model so this result should be interpreted with caution the winner s curse hypothesis states that the winner of a sealed bid auction in which the value of the object being competed for is uncertain tends to be the one who most overestimates the true value of the auctioned object as a result auction winners who fail to recognize this possibility are likely to be cursed by having paid more for the object than its true worth this hypothesis has been applied to various situations including bidding on oil and gas leases capen et al 3 and corporate takeovers roll 16 varaiya 19 support for the existence of the winner s curse has been reported primarily from laboratory experiments bazerman and samuelson 1 kagel and levin 12 testing of the winner s curse hypothesis with market data is in its early stages gilley karels and leone s 7 study of bidding for oil leases provides mixed suport brannman klein and weiss 2 examine bidding behavior in a variety of auction markets and interpret some of their results as supporting the winner s curse hypothesis our study examines the effects of bidder competition and the winner s curse hypothesis within the context of fdic auctions of failed banks our study may also have relevance for the broader corporate control literature this literature uniformly indicates that shareholders of acquired firms earn large

what is the cost of low participation in french timber auctions how much is the timber from public forests worth how can the public forest service define a fair market price for standing timber lots what is the cost of low participation in french timber auctions to estimate the value of a timber lot we adopt the transaction evidence appraisal approach using data from timber auctions in lorraine eastern france accounting for the facts that i the seller s reserve prices are secret ii there remain many unsold lots and iii the number of bidders varies from one auction to another taking into account the endogenous participation in our hedonic price equation for the highest bid we estimate that compared to lots that receive two bids the highest bid is 22 lower when there is only one bid and 37 higher when there are three or more bids

using changes in auction maturity sectors to help identify the impact of qe on gilt yields this article uses a novel way of identifying part of the impact of quantitative easing qe on gilt yields using natural experiments associated with bank of england announcements about changes in the maturity distribution of future gilt purchases we find that changes in expected qe purchases had a significant effect on gilt yields following each announcement in march 2009 august 2009 and february 2012 the local supply effects we identify appear to be important they may account for around half of the total impact on gilt yields in these events and are passed through to yields of related assets

are americans saving optimally for retirement we solve each household s optimal saving decisions using a life cycle model that incorporates uncertain lifetimes uninsurable earnings and medical expenses progressive taxation government transfers and pension and social security benefits with optimal decision rules we compare household by household wealth predictions from the life cycle model using a nationally representative sample we find making use of household specific earnings histories that the model accounts for more than 80 percent of the 1992 cross sectional variation in wealth fewer than 20 percent of households have less wealth than their optimal targets and the wealth deficit of those who are undersaving is generally small

what does monetary policy do to long term interest rates at the zero lower bound this article uses a structural var with daily data to identify the effects of monetary policy shocks on various longer term interest rates since the federal funds rate has been stuck at the zero lower bound the var is identified using the assumption that monetary policy shocks are heteroskedastic monetary policy shocks have especially high variance on days of fomc meetings and certain speeches while there is otherwise nothing unusual about these days a complementary high frequency event study approach is also used i find that stimulative monetary policy shocks lower treasury and corporate bond yields but the effects die off fairly fast

flow effects of central bank asset purchases on sovereign bond prices evidence from a natural experiment we estimate the response of sovereign bond prices to net supply shocks caused by purchase operations under the ecb s public sector purchase programme pspp to avoid simultaneity bias in the estimated relationship between prices and purchases we exploit a pspp feature that renders securities temporarily ineligible for reasons unrelated to their prices using these purchase restrictions as an instrument to identify exogenous variation in purchase volumes we find that pspp causes statistically significant and economically relevant upward price impacts the impacts are short lived and concentrated in securities issued by higher yield jurisdictions and characterized by higher maturity and lower liquidity

close encounters of two kinds false alarms and dashed hopes people are frequently exposed to potentially attractive events that are subsequently and unexpectedly reversed and to potentially painful events which are also unexpectedly reversed in the process of being returned to the initial asset position does the sequence in which the positive and negative events occur matter this issue of the combined effect of pleasurable and painful stimuli has received scant theoretical or empirical attention we attempt to fill this lacuna in the literature by studying the retrospective evaluation of surprises that return individuals to their original economic state although such surprises do not change an individual s original economic state we argue that the individual s psychological state changes and the final affective state is among other things a function of the sequence in which the events occur from a theoretical standpoint several perspectives can be brought to bear on the issue for instance one reading of mental accounting based on prospect theory s value function would predict that losses should dominate gains and therefore regardless of sequence people should be unhappy when exposed to two economically equivalent outcomes of different signs conversely the literature on intertemporal choice would suggest that a series that ends on an up note is preferred to a series that ends on a down note because people like to defer gratification so that they may savor positive outcomes similarly people apparently have a preference for happy endings finally the extant literature on recency effects would predict that the last event in a series should have a disproportionate influence on overall affect our model relies on a shift in the reference point to explain how a surprising reversal of an event will lead to a nonzero evaluation of the sequence we suggest that people s reference points shift immediately but imperfectly after a stimulus is presented intuitively this implies that the first stimulus will shift the reference point in its direction as a result of which the evaluation of a sequence of events in which an initial event is unexpectedly reversed will be more favorable if the first event is a loss than if it is a gain this model captures the unanticipated nature of the second event i e the surprise element by allowing the first event to move the reference point consequently by the time the next event occurs the reference point has been updated as a result of which the zero economic outcome of the sequence yields nonzero utility we further posit that the magnitude of the reference point shift should be affected by the time elapsed between the two stimuli specifically the reference point shifts gradually with time until it is fully updated consequently the final affective state of the sequence is also a function of the temporal distance between the two events the main predictions of the model were empirically supported first in a survey using a mall intercept sample subsequently we conducted a study of student subjects involving a coin tossing game in which real money was at stake and in which subjects in one condition experienced the second outcome after a two day delay our results from this second study supported the model s prediction regarding the impact of the elapsed time between the events the experimental tasks involved surprising reversals of initial outcomes thus ensuring that savoring dread types of explanations which require that subjects anticipate the second event could not be operating finally in a series of three follow up studies we tested the claim that the magnitude of outcomes would have an impact on observed affect and consistent with our theory and contrary to recency predictions we observed similar results across different magnitudes while theoretically interesting we should also note that our research is of potential pragmatic significance people s reactions to a series of events is of considerable interest to marketers desirous of generating enhanced attitude affect purchase intention and the like without offering economic inducements such as rebates coupons or other costly discounts additionally public policy officials may be interested in protecting people from being manipulated into purchasing a product simply because of changes in the sequence in which a series of offers is made by the merchant

individual preferences and the exponential growth bias abstract the exponential growth bias egb refers to individuals underestimation of the effects of exponential growth and has been shown to affect important financial decisions such as retirement savings we develop and test a novel experimental design to evaluate the magnitude of the egb based on multiple price lists our design simultaneously elicits the egb as well as subjects utility curvatures and time preferences allowing for non linear utility we structurally estimate the magnitude of the egb as about half as large as when linear utility is assumed these results shed light on the relationship between individual preferences and the egb

bang for the buck gain loss ratio as a driver of judgment and choice prominent decision making theories propose that individuals should evaluate alternatives by combining gains and losses in an additive way instead we suggest that individuals seek to maximize the rate of exchange between positive and negative outcomes and thus combine gains and losses in a multiplicative way sensitivity to gain loss ratio provides an alternative account for several existing findings and implies a number of novel predictions it implies greater sensitivity to losses and risk aversion when expected value is positive but greater sensitivity to gains and risk seeking when expected value is negative it also implies more extreme preferences when expected value is positive than when expected value is negative these predictions are independent of decreasing marginal sensitivity loss aversion and probability weighting three key properties of prospect theory five new experiments and reanalyses of two recently published studies support these predictions this paper was accepted by yuval ro

conducting monetary policy at very low short term interest rates can monetary policy committees accustomed to describing their plans and actions in terms of the level of a short term nominal interest rate find effective means of conducting and communicating their policies when that rate is zero or close to zero the very low levels of interest rates in japan switzerland and the united states in recent years have stimulated much interesting research on this question and have led some central banks to make changes in their operating procedures and communications strategies in this paper we will give a brief overview of current thinking on the conduct of monetary policy when short term interest rates are very low or even zero monetary policy works for the most part by influencing the prices and yields of financial assets which in turn affect economic decisions and thus the evolution of the economy when the short term policy rate is at or near zero the conventional means of effecting monetary ease lowering the target for the policy rate is no longer feasible however it would be a mistake to think that monetary policy was impotent we discuss three strategies for stimulating the economy at an unchanged level of the policy rate these involve i providing assurance to investors that short rates will be kept lower in the future than they currently expect ii changing the relative supplies of securities in the marketplace by altering the composition of the central bank s balance sheet and iii increasing the size of the central bank s balance sheet beyond the level needed to set the short term policy rate at zero quantitative easing we also discuss the costs and benefits of very low interest rates an issue that bears on the question of whether the central bank should take the policy rate all the way to zero before undertaking alternative policies

large scale bond purchases in a currency union with segmentation in the market for government debt abstract the literature on large scale purchases of government debt emphasises the importance of bond market segmentation along the maturity dimension for their transmission this study investigates how another form of segmentation that we observe the segmentation of government bond markets across countries can be exploited by the central bank of a currency union in which fiscal coordination is not attainable it is shown first that under general conditions government bond purchases which lower bond yields have first order effects on demand and hence inflation through a fiscal channel even in the absence of heterogeneity in investment opportunities the total effect on aggregate demand can be broken down into an income from debt issuance effect and a primary surplus effect as a result the central bank is able to use government bond purchases to control the terms of trade and achieve asymmetric degrees of stimulus across the members of the currency union without a transfer of resources if there is cross country segmentation in bond markets and home bias in government spending the paper characterises the welfare optimising mix of conventional interest rate policy and bond purchases in this scenario and gives an upper bound on the welfare benefits from using the additional tool

the determinants of prices in the fcc s 700 mhz spectrum auction this article examines the prices paid for 700mhz licenses in recent federal communications commission auctions econometric modelling confirms the presence of economies of scale and scope in wireless spectrum valuations that is higher prices are recorded for areas with large populations whilst lower prices are realized for geographically large areas also smaller geographic license areas appear to meet bidders demand more effectively and licenses in areas with high incomes are sold at higher prices not surprisingly more strict deployment requirements and the presence of harmful technical interference reduce prices also paired spectrum receives higher prices than unpaired spectrum interestingly high minimum opening bids and upfront deposits are associated with higher prices finally competitive bidding places upward pressure on prices

quantitative easing in the united kingdom evidence from financial markets on qe1 and qe2 during the recent financial crisis the bank of england like many other central banks loosened monetary policy using both conventional and unconventional measures the main unconventional measure used by the bank was the policy of asset purchases mainly of government bonds financed by the creation of central bank money so called quantitative easing qe during march 2009 to january 2010 and october 2011 to may 2012 the bank completed asset purchases of 200 billion qe1 and 125 billion qe2 respectively the decision to resume purchases in july 2012 will mean that by november 2012 the bank will have bought a total of 375 billion of assets equivalent to around 25 per cent of annual gdp this article reviews the transmission channels through which asset purchases operate and assesses the impact of qe1 and qe2 on financial markets copyright 2012 oxford university press

unconventional monetary policy the assessment the uncon ventional monetary policy measures adopted by the major central banks in the period since 2008 are discussed in this paper we highlight some important differences between quan titative easing and conventional monetary policy and then evaluate the mechanisms through which quantitative easing may propagate to financial markets and the real economy drawing on perspec tives from monetarist and new keynesian theory additional measures intended to supplement or strengthen the effects of pure quantitative easing often termed unconventional unconventional monet ary policy are also assessed in our discussion we relate the various articles in this issue to some of the key research questions posed in relation to unconventional monetary policy

the red and the black mental accounting of savings and debt in the standard economic account of consumer behavior the cost of a purchase takes the form of a reduction in future utility when expenditures that otherwise could have been made are forgone the reality of consumer hedonics is different when people make purchases they often experience an immediate pain of paying which can undermine the pleasure derived from consumption the ticking of the taxi meter for example reduces one s pleasure from the ride we propose a double entry mental accounting theory that describes the nature of these reciprocal interactions between the pleasure of consumption and the pain of paying and draws out their implications for consumer behavior and hedonics a central assumption of the model which we call prospective accounting is that consumption that has already been paid for can be enjoyed as if it were free and that the pain associated with payments made prior to consumption but not after is buffered by thoughts of the benefits that the payments will finance another important concept is coupling which refers to the degree to which consumption calls to mind thoughts of payment and vice versa some financing methods such as credit cards tend to weaken coupling whereas others such as cash payment produce tight coupling our model makes a variety of predictions that are at variance with economic formulations contrary to the standard prediction that people will finance purchases to minimize the present value of payments our model predicts strong debt aversion that they should prefer to prepay for consumption or to get paid for work after it is performed such pay before sequences confer hedonic benefits because consumption can be enjoyed without thinking about the need to pay for it in the future likewise when paying beforehand the pain of paying is mitigated by thoughts of future consumption benefits contrary to the economic prediction that consumers should prefer to pay at the margin for what they consume our model predicts that consumers will find it less painful to pay for and hence will prefer flat rate pricing schemes such as unlimited internet access at a fixed monthly price even if it involves paying more for the same usage other predictions concern spending patterns with cash charge or credit cards and preferences for the earmarking of purchases we test these predictions in a series of surveys and in a conjoint like analysis that pitted our double entry mental accounting model against a standard discounting formulation and another benchmark that did not incorporate hedonic interactions between consumption and payments our model provides a better fit of the data for 60 of the subjects the discounting formulation provides a better fit for only 29 of the subjects even when allowing for positive and negative discount rates the pain of paying we argue plays an important role in consumer self regulation but is hedonically costly from a hedonic perspective the ideal situation is one in which payments are tightly coupled to consumption so that paying evokes thoughts about the benefits being financed but consumption is decoupled from payments so that consumption does not evoke thoughts about payment from an efficiency perspective however it is important for consumers to be aware of what they are paying for consumption this creates a tension between hedonic efficiency and what we call decision efficiency various institutional arrangements such as financing of public parks through taxes or usage fees play into this tradeoff a producer developing a pricing structure for their product or service should be aware of these two conflicting objectives and should try to devise a structure that reconciles them

auctioning and bargaining an econometric study of timber auctions with secret reservation prices this article considers a first price sealed bid auction at which the seller s reservation price is not announced in advance we allow for a second round of bargaining and consider the nash bargaining outcome when the object is unsold after the auctioning round we characterize the bidders and seller s bayesian nash equilibrium strategies the distributions of the buyers and seller s private values are estimated by nonlinear least squares from auction data on standing timber while solving numerically the differential equations characterizing the seller s and buyers equilibrium strategies the performance of the estimated model is then compared to a model in which the players behave myopically

discount rates inferred from decisions an experimental study two hundred and four students of economics and finance participated in an intertemporal choice experiment which manipulated three dimensions in a 4 4 4 factorial design scenario postponing a receipt postponing a payment expediting a receipt expediting a payment time delay 0 5 1 2 and 4 years and size of cashflow 40 200 1000 and 5000 individual discount rates were inferred from the responses and then used to test competitively four hypotheses regarding the behavior of discount rates the classical hypothesis asserting that the discount rate is uniform across scenarios time delays and sums of cashflow was flatly rejected a market segmentation approach was found lacking the results support an implicit risk hypothesis according to which delayed consequences are associated with an implicit risk value and an added compensation hypothesis which asserts that individuals require compensation for a change in their financial position

discounting time and time discounting subjective time perception and intertemporal preferences abstract consumers often make decisions about outcomes and events that occur over time this research examines consumers sensitivity to the prospective duration relevant to their decisions and the implications of such sensitivity for intertemporal trade offs especially the degree of present bias i e hyperbolic discounting the authors show that participants subjective perceptions of prospective duration are not sufficiently sensitive to changes in objective duration and are nonlinear and concave in objective time consistent with psychophysical principles more important this lack of sensitivity can explain hyperbolic discounting the results replicate standard hyperbolic discounting effects with respect to objective time but show a relatively constant rate of discounting with respect to subjective time perceptions the results are replicated between subjects experiment 1 and within subjects experiments 2 with multiple time horizons and multiple descriptors and with different measurement ord

financial literacy financial education and downstream financial behaviors policy makers have embraced financial education as a necessary antidote to the increasing complexity of consumers financial decisions over the last generation we conduct a meta analysis of the relationship of financial literacy and of financial education to financial behaviors in 168 papers covering 201 prior studies we find that interventions to improve financial literacy explain only 0 1 of the variance in financial behaviors studied with weaker effects in low income samples like other education financial education decays over time even large interventions with many hours of instruction have negligible effects on behavior 20 months or more from the time of intervention correlational studies that measure financial literacy find stronger associations with financial behaviors we conduct three empirical studies and we find that the partial effects of financial literacy diminish dramatically when one controls for psychological traits that have been omitted in prior research or when one uses an instrument for financial literacy to control for omitted variables financial education as studied to date has serious limitations that have been masked by the apparently larger effects in correlational studies we envisage a reduced role for financial education that is not elaborated or acted upon soon afterward we suggest a real but narrower role for just in time financial education tied to specific behaviors it intends to help we conclude with a discussion of the characteristics of behaviors that might affect the policy maker s mix of financial education choice architecture and regulation as tools to help consumer financial behavior this paper was accepted by uri gneezy behavioral economics

alternative models of managerial behavior empirical tests for the petroleum industry explanations for takeovers often focus on managerial inefficiency as an explanation this paper utilizes panel data for a set of petroleum firms to test two competing hypotheses about managerial inefficiency the heterogeneous managerial model versus the free cash flow variant of agency theory by focusing on specific investment categories like exploration bidding and leasing activity and r 50d the effects of changes in management and cash flow are better isolated the empirical results provide considerable support for the free cash flow variant of agency theory showing that reduced cash flow due to restructuring will curtail investments in exploration bidding and leasing activity and r 50d copyright 1989 by mit press

exponential growth bias and household finance exponential growth bias is the pervasive tendency to linearize exponential functions when assessing them intuitively we show that exponential growth bias can explain two stylized facts in household finance the tendency to underestimate an interest rate given other loan terms and the tendency to underestimate a future value given other investment terms bias matters empirically more biased households borrow more save less favor shorter maturities and use and benefit more from financial advice conditional on a rich set of household characteristics there is little evidence that our measure of exponential growth bias merely proxies for broader financial sophistication what drives household financial decisions the canonical economic model assumes that consumers choose to consume borrow or save based on their preferences their expectations and the costs and benefits of borrowing and saving a growing body of work applies insights from psychology to enrich specifications of three of the model s key pieces preferences expectations and problem solving conditional on parameter values 1 in this paper we bring psychological evidence to bear on a fourth specification issue how consumers perceive the costs and benefits of borrowing and saving we begin by tying together existing and new evidence on these cost perceptions to show that most consumers err systematically when given information commonly available in the market on the saving side consumers display future value bias a systematic tendency to underestimate a future value given

the financial market impact of uk quantitative easing after outlining some of the monetary developments associated with quantitative easing qe we measure the impact of the uk s initial 2009 10 qe programme on bonds and other assets first we use a macro nance yield curve both to create a counterfactual path for bond yields and to estimate the impact of qe directly second we analyse the impact of individual qe operations on a range of asset prices we nd that qe signi cantly lowered government bond yields through the portfolio balance

could a higher inflation target enhance macroeconomic stability recent international experience with the effective lower bound on nominal interest rates has rekindled interest in the benefits of inflation targets above 2 per cent we evaluate whether an increase in the inflation target to 3 or 4 per cent could improve macroeconomic stability in the canadian economy

the determinants of price in 3g spectrum auctions this article examined the empirical relationship between prices paid for national 3g wireless licenses when spectrums were sold by auction the reduced form modelling approach was based on the prem

when two plus two is not equal to four errors in processing multiple percentage changes when evaluating the net impact of a series of percentage changes we predict that consumers may employ a whole number computational strategy that yields a systematic error in their calculation we report on three studies conducted to examine this issue in the first study we identify the computational error and demonstrate its consequences in a second study we identify several theoretically driven boundary conditions for the observed phenomenon finally we demonstrate in a real world retail setting that consistent with our premise sequential percentage discounts generate more purchasers sales revenue and profit than the economically equivalent single percentage discount

the federal reserve s large scale asset purchase programmes rationale and effects we provide empirical estimates of the effect of large scale asset purchases lsaps on longer term us treasury yields within a framework that allows for several transmission channels including the scarcity channel associated with the preferred habitat literature and the duration channel associated with interest rate risk we also clarify lsaps role in the broader context of historical monetary policy strategy results indicate that lsap style operations mainly impact longer term rates via the nominal term premium within that premium the response is predominantly embodied in the real term premium the scarcity and duration channels both seem to be of considerable importance

payment depreciation the behavioral effects of temporally separating payments from consumption research suggests that individuals mentally track the costs and benefits of a consumer transaction for the purpose of reconciling those costs and benefits on completion of the transaction prelec and loewenstein 1998 thaler 1980 1985 in transactions where costs precede benefits this can lead to a systematic and economically irrational attention to sunk costs arkes and blumer 1985 thaler 1980 in this article we consider economic exchanges in which costs significantly precede benefits as with many prepayment types of consumer transactions we predict a consumer will gradually adapt to a historic cost with the passage of time thereby decreasing its sunk cost impact on the consumption of a pending benefit we label this process of gradual adaptation to costs payment depreciation in a series of experiments we find evidence of payment depreciation across a range of consumer transactions and offer insight into the behavioral implications of temporally separating costs from benefits

misunderstanding savings growth implications for retirement savings behavior abstract people systematically underestimate exponential growth this article illustrates this phenomenon its implications and some potential interventions in the context of saving for retirement where savings grow exponentially over long periods of time experiment 1 shows that a majority of participants expect savings over 40 years to grow linearly rather than exponentially leading them to grossly underestimate their account balance at retirement experiment 2 demonstrates that this misunderstanding leads to underestimates of the cost of waiting to save which makes putting off saving more attractive than it should be finally experiments 3 5 show that highlighting the exponential growth of savings motivates both college students and employees to save more for retirement making clear to employees the exponential growth of savings before they make crucial decisions about how much to save may be a simple and effective means of increasing retirement savings

the effect of future event markers on intertemporal choice is moderated by the reliance on emotions versus reason to make decisions this research examines how future event markers influence intertemporal choice and it demonstrates across five studies that the number of salient events between a smaller sooner and larger later option impacts patience the direction of the effect depends on whether the individual relies on emotion versus reason to make decisions for those who rely on emotion additional events increase patience conversely for individuals who rely on reason additional events decrease patience these effects are driven by perceptions of time as events contract perceptions of time for emotional decision makers but expand perceptions of time for rational decision makers implications arise for intertemporal choice time perception and emotional versus rational decision making

loss aversion under prospect theory a parameter free measurement agrowing body of qualitative evidence shows that loss aversion a phenomenon formalized in prospect theory can explain a variety of field and experimental data quantifications of loss aversion are however hindered by the absence of a general preference based method to elicit the utility for gains and losses simultaneously this paper proposes such a method and uses it to measure loss aversion in an experimental study without making any parametric assumptions thus it is the first to obtain a parameter free elicitation of prospect theory s utility function on the whole domain our method also provides an efficient way to elicit utility midpoints which are important in axiomatizations of utility several definitions of loss aversion have been put forward in the literature according to most definitions we find strong evidence of loss aversion at both the aggregate and the individual level the degree of loss aversion varies with the definition used which underlines the need for a commonly accepted definition of loss aversion

cross border spillover effects of unconventional monetary policies on swiss asset prices abstract unconventional monetary policies umps announced by the federal reserve the european central bank the bank of england and the bank of japan exert important spillover effects on asset prices in switzerland using a broad ump event set and a long term bond futures based measure of market anticipation we show that surprisingly expansionary umps lower swiss government and corporate bond yields induce the swiss franc to appreciate and dampen swiss equity prices four extensions provide further insights first the estimated effects are strongest for announcements by the ecb second the impact on government bonds is largest for bonds with residual maturities of 7 10 years third the impact of foreign ump shocks on exchange rates and swiss bond yields is less pronounced after the introduction of the minimum rate of 1 20 swiss franc per euro by the swiss national bank on september 6 2011 indicating that domestic monetary policy action partially affects the impact of external monetary shocks on domestic financial markets fourth the sign of spillover effects differs for positive and negative ump surprises but their strength does not

predicting retirement savings using survey measures of exponential growth bias and present bias in a nationally representative sample we predict retirement savings using survey based elicitations of exponential growth bias egb and present bias pb we find that egb the tendency to neglect compounding and pb the tendency to value the present over the future are highly significant and economically meaningful predictors of retirement savings these relationships hold controlling for cognitive ability financial literacy and a rich set of demographic controls we address measurement error as a potential confound and explore mechanisms through which these biases may operate back of the envelope calculations suggest that eliminating egb and pb would increase retirement savings by approximately 12 percent

an empirical study on intertemporal decision making under risk this study compares time preference in the cases of certainty and risk we analyze both matching and choice behavior we find that violations of the stationarity axiom are restricted to matching behavior both for certainty and risk we also compare the discounting of certain and risky outcomes as well as the discounting of gains and losses in matching tasks certain outcomes are discounted more than risky ones we could not confirm these results in a choice task gains and losses are not found to be discounted at different rates

market structure and incomplete information price formation in a real world repeated english auction abstract this paper examines the effect of buyer size on price formation in an english auction of used state police cars while open auctions generally favor competitive pricing bikhchandani 1988 develops a model of a second price common value auction in which bidders can use strategic behavior based on repeated sales to develop an aggressive reputation and as a result pay lower prices in equilibrium the paper tests this hypothesis by examining sales of 340 used automobiles sold at 13 public auctions conditional on the volume of purchases made by the three largest buyers at the auctions the empirical results show that the number of buyers plays a stronger role in price formation than does buyer size

looming losses in future time perception abstract it is proposed that a future time interval s perceived length will be affected by whether the interval ends with a gain or loss confirming this several experiments indicate that consumers perceive intervals ending with losses as shorter than equivalent intervals ending with gains the authors explore the mechanisms underlying these effects and they identify several parallels between the current effects and loss aversion the authors further show that these changes in time perception influence consumption decisions and they consider the implications of the findings for theories of time perception and intertemporal choice

discount rates for time versus dates the sensitivity of discounting to time interval description abstract six experiments examine the impact of time interval descriptions on consumers discount rates consumers exhibit more discounting e g they demand more money to delay income when delay intervals are described by extents of time than when delay intervals are described by dates this pattern holds in various contexts including gains and losses and is robust to response mode changes findings further indicate that this effect may arise because compared with date descriptions extent descriptions enhance perceptions of interval length the author discusses other potential mechanisms and implications

reframing the discount as a comparison against the sale price does it make the discount more attractive abstractsales induced through price promotions depend heavily on discount depth so firms create mechanisms to influence perceptions of discount depth typically consumers compute discount depth as the difference between the sale price and the original price with this difference compared against the original price but thus far no research has examined the effect of reframing this difference by comparing the discount depth against the sale price multiple studies including a field study across four grocery stores show that framing the discount depth by comparing it against the sale price increases consumers discount depth perceptions and thus increases purchase intentions as evidence of the underlying process the authors identify boundary conditions related to both individual differences numeracy and managerially relevant factors discount depth size in addition to contributing to research on price promotions behavioral pricing and numeric processing the article offers implications for both

the political economy of farmland ownership regulations and land prices one of the most ubiquitous forms of agricultural regulation is a restriction on farmland ownership one canadian example of a farmland ownership restriction is the saskatchewan farm security act fsa passed in 1974 the purpose of this article is to explain using a political economy framework why the fsa was implemented and to estimate the effect of the fsa on saskatchewan farmland values a present value pv model is used to estimate the relationship between land values rents and the regulation the hausman endogeneity test reveals that the regulation variable is endogenous with the land price the sign of the regulation variable is negative which fits with the theory i e the more stringent the regulation the lower the land value we estimate that the regulation lowered saskatchewan farmland prices by an average of 4 to 34 us acre depending on whether ordinary least squares ols or two stage least squares tsls is employed in the estimation over the period of 1974 2001