speculative investor behavior and learning as traders learn about the true distribution of some asset s dividends a speculative premium occurs as each trader anticipates the possibility of reselling the asset to another trader before complete learning has occurred small differences in prior beliefs lead to large speculative premiums during the learning process this phenomenon helps explain a paradox concerning the pricing of initial public offerings the result casts light on the significance of the common prior assumption in economic models

an approach to asset pricing under incomplete and diverse perceptions we model a dynamic competitive market where in every period risk neutral traders trade a one period bond against an infinitely lived asset with limited short selling of the long term asset traders lack structural knowledge and use different incomplete theories all of which give statistically correct beliefs about next period s market price of the long term asset the more theories there are in the market the higher is the equilibrium price of the long term asset investors with more complete theories do not necessarily earn higher returns than those with less complete ones who can earn above the risk free rate we provide two necessary conditions for a trader to earn above the risk free rate

a test of the rational expectations hypothesis using data from a natural experiment data on contestants choices in italian game show affari tuoi are analysed in a way that separates the effect of risk attitude preferences from that of beliefs concerning the amount of money that will be offered to contestants in future rounds this separate identification is possible by virtue of the fact that at a certain stage of the game beliefs are not relevant and risk attitude is the sole determinant of choice the rational expectations hypothesis is tested by comparing the estimated belief function with the true offer function which is estimated extraneously using data on offers actually made to contestants we find a close correspondence leading us to accept the rational expectations hypothesis the importance of belief formation is confirmed by the estimation of a mixture model which establishes that the vast majority of contestants are forward looking as opposed to myopic

claim timing and ex post adverse selection many health care treatments are not urgent and may be delayed if patients so choose because insurance coverage is typically determined by the treatment date individuals may have incentives to strategically delay treatments to minimize out of pocket costs the strategic delay of treatment a particular form of moral hazard can be an important source of subsequent adverse selection in which ex ante identical individuals select insurance coverage based on their differing accumulation of previously delayed treatments this article investigates these forces empirically in the context of the missing market for dental insurance using rich claim level data my analysis reveals that approximately 40 of individuals strategically delay dental treatments when incentivized to do so and this flexibility in delaying treatment can explain why the market for dental insurance has largely unraveled more generally the counterfactual analysis suggests features such as open enrolment periods and contracting on pre existing conditions may be helpful tools in overcoming adverse selection in insurance contexts where the timing of uncertainty is not contractible

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

game shows and economic behavior risk taking on card sharks this paper studies individual risk taking behavior with a unique data set risky decisions of contestants during the threeyear history of the television game show card sharks in the bonus round of the game individuals choose how much to wager on positive expected value gambles with known and varying probabilities and large possible payouts since no special skills or knowledge are involved empirical analysis is not complicated by a contestant s superior information about her own abilities stakes can reach 16 000 and average 3 200 few experimental budgets permit even one observation of this magnitude first i simply estimate how risk averse contestants behave under the assumption of expected utility maximization i estimate a lower bound for the coefficient of absolute risk aversion of 0 00031 which when multiplied by per capita u s personal income gives an estimate of relative risk aversion of 4 8 this estimate is higher than most econometric estimates of risk aversion contestants however do not act in a manner consistent with expected utility maximization so this number should not be given a structural interpretation rather it is simply a useful way to summarize average willingness to bear risk of individuals on the show second i explore how individual behavior is inconsistent with expected utility theory the amount a contestant wishes to wager depends critically on the amount of wealth she has accumulated in the bonus round and therefore on the size of the stakes this is at odds with expected utility theory since the size of the stakes although far from insignificant is small relative to a person s wealth contestants should then have close to constant absolute risk aversion with respect to accumulated winnings in the game a more striking result deals with contestants who had previ

crime rates and local labor market opportunities in the united states 1979 1997 the labor market prospects of young unskilled men fell dramatically in the 1980s and improved in the 1990s crime rates show a reverse pattern increasing during the 1980s and falling in the 1990s because young unskilled men commit most crime this paper seeks to establish a causal relationship between the two trends previous work on the relationship between labor markets and crime focused mainly on the relationship between the unemployment rate and crime and found inconclusive results in contrast this paper examines the impact of both wages and unemployment on crime and uses instrumental variables to establish causality we conclude that both wages and unemployment are significantly related to crime but that wages played a larger role in the crime trends over the last few decades these results are robust to the inclusion of deterrence variables controls for simultaneity and controlling for individual and family characteristics

does market experience eliminate market anomalies the case of exogenous market experience a vibrant literature has emerged that suggests willingness to pay and willingness to accept measures of value are quite different for inexperienced consumers but that value differences erode with market experience one potential shortcoming of this literature is that market experience is endogenous this study presents a framed field experiment that exogenously induces market experience empirical findings support the premise that market experience alone can eliminate an important market anomaly

assessing individual risk attitudes using field data from lottery games we use information from the television game show with the highest guaranteed average payoff in the united states hoosier millionaire to analyze risktaking in a high stakes experiment we characterize gambling decisions under alternative assumptions about contestant behavior and preferences and derive testable restrictions on individual risk attitudes based on this characterization we then use an extensive sample of gambling decisions to estimate distributions of risk aversion parameters consistent with the theoretical restrictions and revealed preferences we find that although most contestants display risk averse preferences the extent of the risk aversion implied by our estimates varies substantially with the stakes involved in the different decisions

a new method of estimating risk aversion i show existing evidence on labor supply behavior places an upper bound on risk aversion in the expected utility model i derive a formula for the coefficient of relative risk aversion in terms of the ratio of the income elasticity of labor supply to wage elasticity and degree of complementarity between consumption and labor i bound the degree of complementarity using data on consumption choices when labor supply varies across states using labor supply elasticity estimates i find a mean estimate of 1 then show generating 2 requires that wage increases cause sharper labor supply reductions jel d81 j22

regulating consumer financial products evidence from credit cards we analyze the effectiveness of consumer financial regulation by considering the 2009 credit card accountability responsibility and disclosure card act we use a panel data set covering 160 million credit card accounts and a difference in differences research design that compares changes in outcomes over time for consumer credit cards which were subject to the regulations to changes for small business credit cards which the law did not cover we estimate that regulatory limits on credit card fees reduced overall borrowing costs by an annualized 1 6 of average daily balances with a decline of more than 5 3 for consumers with fico scores below 660 we find no evidence of an offsetting increase in interest charges or a reduction in the volume of credit taken together we estimate that the card act saved consumers 11 9 billion a year we also analyze a nudge that disclosed the interest savings from paying off balances in 36 months rather than making minimum payments we detect a small increase in the share of accounts making the 36 month payment value but no evidence of a change in overall payments jel codes d0 d14 g0 g02 g21 g28 l0 l13 l15

bayesian networks and boundedly rational expectations i present a framework for analyzing decision makers with an imperfect understanding of their environment s correlation structure the decision maker faces an objective multivariate probability distribution his own action is one of the random variables he is characterized by a directed acyclic graph over the set of variables his subjective belief filters the objective distribution through his graph via the factorization formula for bayesian networks this belief distortion implies that the decision maker s long run behavior may affect his perception of the consequences of his actions accordingly i define a personal equilibrium notion of optimal choices i show how recent models of boundedly rational expectations as well as new ones e g reverse causality can be subsumed into this framework as special cases some general properties of the bayesian network representation of subjective beliefs are presented as well as a missing data foundation

minimum wages and alcohol related traffic fatalities among teens abstract using cross state variation in minimum wages we observe a positive relationship between the minimum wage and the number of alcohol related accidents involving teen drivers a similar effect is not observed when examining accidents among adults the results are consistent with a positive income elasticity for alcoholic beverages and driving activities among young people in particular for consumption out of discretionary income accorded by higher minimum wages evidence of a sizable impact of beer taxes on alcohol related accidents among youths suggests that beer taxes are one avenue for policymakers to consider in counteracting this unintended consequence of minimum wages

are women more risk averse we find that single women exhibit relatively more risk aversion in financial decision making than single men using u s sample data we examine household holdings of risky assets to determine whether there are gender differences in financial risk taking as wealth increases the proportion of wealth held as risky assets is estimated to increase by a smaller amount for single women than for single men gender differences in financial risk taking are also influenced by age race and number of children greater financial risk aversion may provide an explanation for women s lower levels of wealth compared with men s jel j16 d81 g11

correlation misperception in choice we present a decision theoretic analysis of an agent s understanding of the interdependencies in her choices we provide the foundations for a simple and flexible model that allows the misperception of correlated risks we introduce a framework in which the decision maker chooses a portfolio of assets among which she may misperceive the joint returns and present simple axioms equivalent to a representation in which she attaches a probability to each possible joint distribution over returns and then maximizes subjective expected utility using her possibly misspecified beliefs

modeling the economic interaction of agents with diverse abilities to recognize equilibrium patterns we model differences among agents in their ability to recognize temporal patterns of prices using the concept of debruijn sequences in two dynamic models of markets we demonstrate the existence of equilibria in which prices fluctuate in a pattern that is independent of the fundamentals and that can be recognized only by the more competent agents jel c7 d4 s477

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

when risk is weird unexplained transaction features lower valuations we define transactions as weird when they include unexplained features that is features not implicitly explicitly or self evidently justified and propose that people are averse to weird transactions in six experiments we show that risky options used in previous research paradigms often attained uncertainty via adding an unexplained transaction feature e g purchasing a coin flip or lottery and behavior that appears to reflect risk aversion could instead reflect an aversion to weird transactions specifically willingness to pay drops just as much when adding risk to a transaction as when adding unexplained features holding transaction features constant adding additional risk does not further reduce willingness to pay we interpret our work as generalizing ambiguity aversion to riskless choice the online supplement is available at https doi org 10 1287 mnsc 2017 2868 and http osf io fzjuw this paper was accepted by yuval rottenstreich judgment and decision making

rejecting small gambles under expected utility this paper contributes to an important recent debate around expected utility and risk aversion rejecting a gamble over a given range of wealth levels imposes a lower bound on risk aversion using this lower bound and empirical evidence on the range of the risk aversion coefficient we calibrate the relationship between risk attitudes over small stakes and large stakes gambles we find that rejecting small gambles is consistent with expected utility contrary to a recent literature that concludes that expected utility is fundamentally unfit to explain decisions under uncertainty paradoxical behavior is only obtained when calibrations are made in a region of the parameter space that is not empirically relevant

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

thar she blows gender competition and bubbles in experimental asset markets do women and men behave differently in financial asset markets our results from an asset market experiment show a marked gender difference in producing speculative price bubbles mixed markets show intermediate values and a meta analysis of 35 markets from different studies confirms the inverse relationship between the magnitude of price bubbles and the frequency of female traders in the market women s price forecasts also are significantly lower even in the first period implications for financial markets and experimental methodology are discussed jel d14 d81 g01 g11 j16

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

the small sample bias of the gini coefficient results and implications for empirical research the gini coefficient is a downward biased measure of inequality in small populations when income is generated by one of three common distributions the paper discusses the sources of bias and argues that this property is far more general this has implications for i the comparison of inequality among subsamples some of which may be small and ii the use of the gini in measuring firm size inequality in markets with a small number of firms the small sample bias has often led to misperceptions about trends in industry concentration a small sample adjustment results in a reduced bias which can no longer be signed this remaining bias rises with the dispersion and falls with increasing skewness of the distribution finally an empirical example illustrates the importance of using the adjusted gini in this example it is shown that controlling for market characteristics larger shipping cartels include a set of firms that is stochastically identical in terms of relative size to those of smaller shipp

constructive consumer choice processes consumer decision making has been a focal interest in consumer research and consideration of current marketplace trends e g technological change an information explosion indicates that this topic will continue to be critically important we argue that consumer choice is inherently constructive due to limited processing capacity consumers often do not have well defined existing preferences but construct them using a variety of strategies contingent on task demands after describing constructive choice consumer decision tasks and decision strategies we provide an integrative framework for understanding constructive choice review evidence for constructive consumer choice in light of that framework and identify knowledge gaps that suggest opportunities for additional research

can agents with causal misperceptions be systematically fooled using data on house sales and inventories this paper shows that housing market dynamics are driven mainly by listings and less so by transaction speed thus the decision to move house is key to understanding the housing market the paper builds a model where moving house is essentially an investment in match quality implying that moving depends on macroeconomic developments and housing market conditions the endogeneity of moving means there is a cleansing effect those at the bottom of the match quality distribution move first which generates overshooting in aggregate variables the model is applied to the 1995 2004 housingmarket boom

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

the effects of the minimum wage on the employment and earnings of youth the employment and earnings effects of the minimum wage are estimated by parameterizing a hypothesized relationship between underlying market employment and wage relationships versus observed wage

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

do state minimum wages affect the incarceration rate because of historically unprecedented increases in the prison population since the late 1970s the united states has the highest incarceration rate in the world using becker s 1968 framework on crime this study investigates the causal relationship between incarceration rates and state minimum wages our identification strategy consists of a state level fixed effects model and autor and dorn s 2013 two stage least squares 2sls approach using the historical local industry structure we predict the change in employment shares of manual task intensive occupations and use those as an instrument for state minimum wages the fixed effects and 2sls estimates suggest that a one dollar increase in state minimum wage leads to approximately 12 25 fewer incarcerations per 100 000 state residents estimates of the heterogeneous impacts by race and gender indicate that the aggregate impact of state minimum wages is entirely driven by men

equilibrium selection payoff or risk dominance the case of the weakest link abstract when a game has more than one nash equilibrium a coordination issue arises pareto and risk dominations are two available criteria to select one of them there is a debate on how to use these criteria when they point in different directions we study the first wave of the weakest link show broadcast in france to generate field data on this issue observed behavior can be rationalized in terms of pareto and risk domination the payoff dominant equilibrium is selected if it is not too risky otherwise players coordinate themselves according to risk dominance this rationalization is in line with the experimental literature

anchoring in payment evaluating a judgmental heuristic in field experimental settings abstractanchoring the biasing of estimates toward a previously considered value is a long standing and oft studied phenomenon in consumer research however most anchoring work has been in the lab and the results from field work have been mixed here the authors use real transactions from an empirically investigated and commercially employed pricing scheme pay what you want to better understand how anchors influence payments sixteen field studies n 21 997 and four hypothetical studies n 3 174 reveal four main points 1 although anchoring replicates both with and without financial consequences studies 1 2 the percentile rank gap between anchors in the distribution of payments is a much stronger predictor of anchoring emerging than merely the absolute gap between the anchors on a number line studies 3 5 2 low anchors influence payments more than high anchors studies 6a b 3 findings from the literature that should enhance anchoring effects anchor precision descriptive and inj

minimum wages and the demand for labor i formulate measures of the effective minimum wage based on broad definitions of the labor costs that face employers and use these measures in reestimating some simple equations relating the relative employment of youths and adults to the u s minimum wage using aggregate data for 1954 78 i then ground the model more closely in the theory of factor demand first by adding the relative wages of youths and adults to the equation describing their relative employment and then by specifying a complete system of demand equations for these two types of labor teen employment responds quite robustly to changes in the effective minimum in these specifications with an elasticity of 0 1 a translog cost function defined over young workers adults and capital shows that the effective minimum wage reduces employers ability to substitute other factors for young workers using both sets of results i find that a subminimum wage for youths would have increased their employment with at most a small loss of jobs among adults this abstract was borrowed from another version of this item

coordination focal points and voting in strategic situations a natural experiment this paper studies coordination in a multi stage elimination tournament with large monetary incentives and a diversified subject pool drawn from the adult british population in the tournament members of an ad hoc team earn money by answering general knowledge questions and then eliminate one contestant by plurality voting without prior communication we find that in the early rounds of the tournament contestants use a focal principle and coordinate on one of the multiple nash equilibria in pure strategies by eliminating the weakest member of the team however in the later rounds contestants switch to playing a mixed strategy nash equilibrium

delinquency schooling and work time allocation decision of youth this paper examines the possible factors that affect the time allocation decision of youth between delinquency schooling and work based on a joint decision model evidence from montreal shows that influences from different social institutions such as family church school peers and the workplace are important determinants of how young people decide to spend their time on various activities the findings provided here take into account the joint decision nature of the problem and therefore provide more precise estimates than those of the existing literature

consistency of risk premium measures this research uses the results of a series of within sample experiments to elicit risk premium measures from agricultural producers results show that there is little consistency between measures in different contexts and using different elicitation methods suggesting that underlying risk preferences are not consistent these results highlight some of the difficulty with expected utility theory and risk measurement

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

lowest unmatched price auctions lowest unmatched price auctions lupas specify that the lowest bid placed by only one participant wins they are used in internet trading and tv and radio shows we model lupas as games with minimal restrictions in particular allowing players to place more than one bid since multiple bids have been observed in most actual lupas though lupas are games for which a closed form solution does not seem to exist in general our model generates several testable implications about the type of strategies played in equilibrium and the highest bid in a given lupa our analysis suggests that players follow strategic considerations and arrive at decisions which at least in the aggregate are generally consistent with theoretical predictions yet there are some remarkable deviations

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

decision making under uncertainty when the stakes are high evidence from a lottery game show illinois instant riches a televised set of three different games of chance provides a natural experiment for assessing the risk taking behavior of individuals recently there have been a limited number of other studies that have also used game shows as natural experiments including card sharks 6 jeopardy 11 and the price is right 1 an advantage of using game shows over most laboratory experiments is the ability to see how individuals respond to wagers involving relatively large sums instant riches is particularly interesting in this regard because it involves very high stakes across the three games played the potential winnings from wagers offered to contestants ranged from 2000 to 100 000 losses from 3000 to 35 000 and expected values from 10 938 to 15 000 given our data our primary research objective is to provide additional evidence on the degree of risk aversion under high stakes wagering to date that evidence is mixed gertner concludes that card sharks contestants are on average risk averse metrick could not reject the hypothesis that jeopardy contestants are risk neutral in respective experimental studies using indian peasant farmers and chinese university students binswanger 2 3 and kachelmeier and shehata 9 employed small nominal stakes that were nonetheless large relative to their subjects monthly incomes e g 20 percent to just over 100 percent of income both reported a shift toward risk aversion as stakes were increased but in the kachelmeier study the subjects remained largely risk neutral in another experimental study this time involving modest stakes e g hundreds of dollars goodman et al 7 found expected value to be the best predictor of las vegas casino patrons certainty equivalents a result implying risk neutrality in all these studies the stakes were lower than for instant riches

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

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

the minimum wage law and youth crimes time series evidence gtrowing evidence indicates that the federal minimum wage law has adversely affected the employment rate the labor force participation rate and on the job training of young workers 1 insofar as the minimum wage has adverse effects on youth labor markets it is also expected to affect the time spent in activities outside the labor market including criminal activities 2 little research has been done on the minimum wage

revisiting games of incomplete information with analogy based expectations this paper studies the effects of analogy based expectations in static two player games of incomplete information players are assumed to be boundedly rational in the way they forecast their opponent s state contingent strategy they bundle states into analogy classes and play best responses to their opponent s average strategy in those analogy classes we provide general properties of analogy based expectation equilibria and apply the model to a variety of well known games we characterize conditions on the analogy partitions for successful coordination in coordination games under incomplete information rubinstein a 1989 the electronic mail game strategic behavior under almost common knowledge amer econ rev 79 385 391 we show how analogy grouping of the receiver may facilitate information transmission in crawford and sobel s cheap talk games crawford v p sobel j 1982 strategic information transmission econometrica 50 1431 1451 and we show how analogy grouping may give rise to betting in zero sum betting games such as those studied to illustrate the no trade theorem

anchoring effects evidence from art auctions in order to separate anchoring where an irrelevant message has an effect on the outcome from rational learning where past prices are not irrelevant because they may be used to estimate unobservable quality we use the following strategy we first develop a hedonic prediction of price for both the current sale e g the 2006 sale and the previous sale these hedonic predic tions are based on observable characteristics of each painting and an index of overall prices we then regress actual sale price on our hedonic prediction on the difference between the actual price in the previous sale and our hedonic prediction this expression tests for anchoring and on the difference between the actual price in the previous sale and our hedonic prediction of price in the previous sale this expression controls for unobservable characteristics the test for anchor ing is the extent to which the actual price in the previous sale affects the current sale price we can identify anchoring from other effects because the demand for art which is captured by the average overall price index changes over time whereas the unobservable component of qual ity is assumed to remain constant between auctions this allows us to control for unobserved quality characteristics as long as something drastic has not happened between sales such as a painting has been deemed a fake which is a very rare occurrence the assumption of constant quality is a realistic one

selection in a field experiment with voluntary participation summary the external validity of experiments in economics can be ensured only if participants reflect the relevant market population we study data from a promotional campaign of nh hoteles to study sample selection problems in a gift exchange field experiment the promotion allowed guests to pay any non negative amount for a stay in one of 36 hotels in belgium and the netherlands we distinguish between involuntary participants who booked prior to the announcement of the promotional campaign and voluntary participants who booked after the campaign was announced the involuntary participants pay on average substantially more this different behavior cannot be explained by differences in satisfaction or observed compositional differences between both groups during the promotion we varied the posted price of a room that was communicated to the guests only the involuntary participants respond to this exogenous variation in the posted price we argue that the promotional campaign mainly attracted individuals with relatively few prosocial reputational concerns because they benefit most from a name your own price scheme copyright 2010 john wiley sons ltd

risk attitudes in large stake gambles evidence from a game show this article estimates the degree of risk aversion of contestants appearing on vas o no vas the mexican version of deal or no deal we consider both dynamic agents who fully backward induct and myopic agents that only look forward one period further we vary the level of forecasting sophistication by the agents we find substantial evidence of risk aversion the degree of which is more modest than what is typically reported in the literature

anchoring on credit spreads this paper documents that the path of credit spreads since a firm s last loan influences the level at which it can currently borrow if spreads have moved in the firm s favor i e declined it is charged a higher interest rate than is justified by current fundamentals whereas if spreads have moved to the firm s detriment it is charged a lower rate we evaluate several possible explanations for this finding and conclude that anchoring to past deal terms is most plausible

the gender of opponents explaining gender differences in performance and risk taking abstract analyzing 8169 contestants over 32 years of the us game show jeopardy we find that women compete more aggressively become marginally more competitive and take on more risk when paired against men specifically a woman is more likely to win a jeopardy episode and within the show to respond to a clue once responding she is also marginally more likely to respond correctly potentially most surprising even the sizeable gender gap in risk taking analyzing daily double wagering decisions disappears once a woman competes in an otherwise all male field of competitors men on the other hand wager significantly less when paired against women only but the gender of opponents does not affect their competitive performance otherwise our rich sample allows us to control for a host of potentially confounding factors and player fixed effects thereby eliminating potential biases from unobservable individual characteristics our findings are consistent with an explanation that emphasizes an adaptation to social norms applied to gender

the house doesn t always win evidence of anchoring among australian bookies abstract we examine australian horseracing bookmakers responses to late scratches instances in which a horse is abruptly withdrawn after betting has commenced our observed bookies exhibit anchoring on the original odds and fail to re adjust odds fully on the remaining horses after a scratch thereby earning lower profit margins and occasionally creating nominal arbitrage opportunities for bettors we also examine which horses odds bookies adjust after a scratch and demonstrate diminished profit margins even after controlling for these endogenous adjustments our results indicate that bookies adjustments recover approximately 80 of lost profit margin but that bookies forgo the remaining 20 due to systematic under adjustments

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

risky choice in the limelight this paper examines how risk behavior in the limelight differs from that in anonymity in two separate experiments we find that subjects are more risk averse in the limelight however risky choices are similarly path dependent in the different treatments under both limelight and anonymous laboratory conditions a simple prospect theory model with a path dependent reference point provides a better explanation for subjects behavior than a flexible specification of expected utility theory additionally our findings suggest that ambiguity aversion depends on being in the limelight that passive experience has little effect on risk taking and that reference points are determined by imperfectly updated expectations

march madness strategic behavior in ncaa basketball tournament betting pools abstract this paper uses data from the natural experiment of ncaa basketball tournament betting pools in a descriptive study of strategic behavior the observed behavior in these pools differs from equilibrium behavior in a robust manner bettors overback the heaviest favorites the size of this bias falls slightly in larger pools where the induced profit opportunities are higher than in smaller pools this indicates that a small number of players are adjusting their behavior to reflect the changing strategic situation while the aggregate behavior remains away from equilibrium

deal or no deal decision making under risk in a large payoff game show we examine the risky choices of contestants in the popular tv game show deal or no deal and related classroom experiments contrary to the traditional view of expected utility theory the choices can be explained in large part by previous outcomes experienced during the game risk aversion decreases after earlier expectations have been shattered by unfavorable outcomes or surpassed by favorable outcomes our results point to reference dependent choice theories such as prospect theory and suggest that path dependence is relevant even when the choice problems are simple and well defined and when large real monetary amounts are at stake

decision making under risk in deal or no deal we analyse the choices of 399 contestants in the australian version of the television game show deal or no deal we calculate risk aversion bounds for each contestant revealing considerable heterogeneity we then estimate a structural stochastic choice model that captures the dynamic decision problem faced by contestants to address individual heterogeneity we nest the dynamic problem within the settings of both a random effects and a random coefficients probit model our structural model produces plausible estimates of risk aversion confirms the role of individual heterogeneity and suggests that a model of stochastic choice is indeed appropriate we find mixed evidence of greater risk aversion by females we also examine generalizations to expected utility theory finding that the rank dependent utility model adds non negligible explanatory power and indicates optimism in probability weighting finally we test but are unable to confirm the existence of an endowment effect for lotteries copyright 2009 john wiley sons ltd

a homeowner s dilemma anchoring in residential real estate transactions abstract we examine whether and how listing strategies impact sale prices in residential home sales literatures in housing economics negotiations and auctions offer diverse predictions around this question on the one hand housing studies typically treat home prices as an objective function of property and neighborhood characteristics yet the large and robust literature on anchoring effects tversky and kahneman 1974 suggests a positive relationship between listing prices and sale prices finally evidence from the auctions literature suggests the opposite pattern through herding behaviors we analyzed more than 14 000 transactions taking into account observable property heterogeneity geographical location and timing of the sales we find that higher starting prices are indeed associated with higher selling prices consistent with anchoring for the average home in our sample over pricing between 10 and 20 leads to an increase in the sale price of 117 163 this effect is particularly strong in areas with higher rates of mortgage foreclosure or serious delinquency additional analyses show that our results are unlikely to be driven by seller motivations or unobserved home qualities we contrast our findings with recommendations and private beliefs of real estate agents who provide services and advice for about 90 of home sales in the us

estimating risk preferences from deductible choice we develop a structural econometric model to estimate risk preferences from data on deductible choices in auto insurance contracts we account for adverse selection by modeling unobserved heterogeneity in both risk claim rate and risk aversion we find large and skewed heterogeneity in risk attitudes in addition women are more risk averse than men risk aversion exhibits a u shape with respect to age and proxies for income and wealth are positively associated with absolute risk aversion finally unobserved heterogeneity in risk aversion is greater than that of risk and as we illustrate has important implications for insurance pricing

anchoring effects on consumers willingness to pay and willingness to accept we examine the susceptibility of consumers willingness to pay wtp and willingness to accept wta judgments to influence by arbitrary anchors the results of four studies suggest that although circumstantial differences between buying and selling decisions can lead to systematic differences in susceptibility to anchoring effects the principles governing the impact of anchoring on wtp and wta judgments are essentially the same in particular robust anchoring effects are observed when the anchor relates to the focal source of uncertainty further wtp and wta judgments are most susceptible to anchoring and endowment effects under uncertainty about the desire to trade the implications of this research for our understanding of anchoring and endowment effects are discussed

adverse selection and inertia in health insurance markets when nudging hurts this paper investigates consumer inertia in health insurance markets where adverse selection is a potential concern we leverage a major change to insurance provision that occurred at a large firm to identify substantial inertia and develop and estimate a choice model that also quantifies risk preferences and ex ante health risk we use these estimates to study the impact of policies that nudge consumers toward better decisions by reducing inertia when aggregated these improved individual level choices substantially exacerbate adverse selection in our setting leading to an overall reduction in welfare that doubles the existing welfare loss from adverse selection jel d82 g22 i13 a number of potential impediments stand in the way of efficient health insur ance markets the most noted of these is adverse selection first studied by akerlof 1970 and rothschild and stiglitz 1976 in insurance markets prices reflect the expected risk costs of the insured pool whether the reason is price regulation or private information when insurers cannot price all risk characteristics riskier consumers choose more comprehensive health plans this causes the equilibrium prices of these plans to rise and healthier enrollees to select less comprehensive coverage than they would otherwise prefer

effects of seller supplied prices on buyers product evaluations reference prices in an internet auction context a field experiment investigated the impact of two external reference points under the seller s control on the final price of an auction when an item s seller specified a high external reference price a reserve price the final bid was greater than when the seller specified a low external reference price a minimum bid when the seller provided both high and low reference prices the reserve influenced the final bid more the low reference price led to a lower outcome compared to when the seller did not communicate any reference price the number of bidders influenced outcomes in the absence of seller supplied reference prices

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

entrepreneurship over the life cycle where are the young entrepreneurs most individuals do not start a business and if they do they start well into their 30s to explain these stylized facts i estimate a dynamic roy model with experience accumulation risk aversion and imperfect information about ability using the panel study of income dynamics information frictions and income risk reduce entrepreneurship by up to 40 and 35 respectively entry costs and information frictions explain most of the delayed entry results from counterfactual policies targeting delayed entry suggest that entrepreneurship education can yield higher returns than subsidies fostering young entrepreneurship yields higher returns than fostering old entrepreneurship

a natural experiment in jeopardy this paper uses the television game show jeopardy as a natural experiment to analyze behavior under uncertainty and the ability of players to choose strategic best responses the results suggest that while most players bet in a rational manner the failure rate for choosing best responses increases as the betting problem grows more complex and that players choices are affected by the frame of the problem however suboptimal betting tends to decrease as inferior players are driven from the game the data also allow for estimation of the extent of risk aversion the results imply near risk neutrality jel c72 c93

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

securing victory or not surrendering optimal play when facing simple calculations a natural experiment from the swedish and us jeopardy this article empirically investigates the common assumption of economicagents capabilities to process complex mathematical problems to findoptimal strategies applied in economic modelling by expl

last place aversion evidence and redistributive implications we present evidence from laboratory experiments showing that individuals are last place averse participants choose gambles with the potential to move them out of last place that they reject when randomly placed in other parts of the distribution in modified dictator games participants randomly placed in second to last place are the most likely to give money to the person one rank above them instead of the person one rank below last place aversion suggests that low income individuals might oppose redistribution because it could differentially help the group just beneath them using survey data we show that individuals making just above the minimum wage are the most likely to oppose its increase similarly in the general social survey those above poverty but below median income support redistribution significantly less than their background characteristics would predict jel codes h23 d31 c91

criminal behaviour and youth in the labour market the case of the pernicious minimum wage this paper empirically tests the relationship between variations in uniform crime reports ucr index crime rates for teenagers 16 19 years of age with changes in the real minimum wage adjusted for industry coverage in the united states for the period 1960 1987 the analysis reveals that there exists a positive relationship between changes in the real minimum wage and teenage criminal homicide forcible rape and motor vehicle theft crime rates these findings are consistent with the empirical evidence concerning the impacts of the minimum wage on youth labour market opportunities and also with the theoretical ad empirical evidence regarding the incidence of criminal activity made as an occupational choice decision formulated under risk and uncertainty however the results indicate no impact of the minimum wage on the other teenage ucr index crime rates as found by hashimoto 1987 the evidence also suggests that variations in real criminal justice expenditures per capita reduce teenage propety crime ra