the effect of payoff feedback and information pooling on reasoning errors evidence from experimental markets avast literature shows that individuals frequently violate normative principles in reasoning in this paper we report the results of four studies designed to determine if information dissemination in competitive auctions can reduce or even eliminate logical errors in the wason selection task our results show that payoff feedback and exposure to the information flow drive the aggregate behavior toward the normative solution we also found evidence of spillover effects from informed to uninformed traders in one sided combinatorial auctions as well as positive transfer effects from competitive to individual settings

choose to lose health plan choices from a menu with dominated option we examine the health plan choices that 23 894 employees at a u s firm made from a large menu of options that differed only in financial cost sharing and premium these decisions provide a clear test of the predictions of the standard economic model of insurance choice in the absence of choice frictions because plans were priced so that nearly every plan with a lower deductible was financially dominated by an otherwise identical plan with a high deductible we document that the majority of employees chose dominated plans which resulted in excess spending equivalent to 24 of chosen plan premiums low income employees were significantly more likely to choose dominated plans and most employees did not switch into more financially efficient plans in the subsequent year we show that the choice of dominated plans cannot be rationalized by standard risk preference or any expectations about health risk testing alternative explanations with a series of hypothetical choice experiments we find that the popularity of dominated plans was not primarily driven by the size and complexity of the plan menu nor informed preferences for avoiding high deductibles but by employees lack of understanding of health insurance our findings challenge the standard practice of inferring risk preferences from insurance choices and raise doubts about the welfare benefits of health reforms that expand consumer choice

first price sealed bid auctions when bidders exhibit different attitudes toward risk abstract when bidders have different risk aversion levels we determine in a first price auction the asymmetric equilibrium strategies we analyze the impact of asymmetric risk aversion levels on bidders markups and on the expected revenue and allocative efficiency of the auction

a model of trading in the art market we present an infinite horizon model of endogenous trading in the art auction market agents make purchase and sale decisions based on the relative magnitude of their private use value in each period our model generates endogenous cross sectional and time series patterns in investment outcomes average returns and buy in probabilities are negatively correlated with the time between purchase and resale attempt idiosyncratic risk does not converge to zero as the holding period shrinks prices and auction volume increase during expansions our model finds empirical support in auction data and has implications for selection biases in observed prices and transaction based price indexes

small worlds modeling attitudes toward sources of uncertainty abstract we introduce the concept of a conditional small world event domain an extension of savage s the foundations of statistics wiley new york 1954 notion of a small world as a self contained collection of comparable events under weak behavioral conditions we demonstrate probabilistic sophistication in any small world event domain without relying on monotonicity or continuity probabilistic sophistication within though not necessarily across small worlds provides a foundation for modeling a decision maker that has source dependent risk attitudes this also helps formalize the idea of source preference and suggests an interpretation of ambiguity aversion often associated with ellsberg type behavior in terms of comparative risk aversion across small worlds

asset pricing and asymmetric reasoning we present a theory and experimental evidence on pricing and portfolio choices under asymmetric reasoning we show that under asymmetric reasoning prices do not reflect all types of reasoning some agents who observe prices that cannot be reconciled with their reasoning switch from perceiving the environment as risky to perceiving it as ambiguous if they are ambiguity averse these agents become price insensitive results from an experiment show that consistent with the theory i without aggregate risk mispricing decreases as the fraction of price sensitive agents increases and ii with aggregate risk price insensitive agents trade to more balanced portfolios

ambiguity aversion and comparative ignorance decisions under uncertainty depend not only on the degree of uncertainty but also on its source as illustrated by ellsberg s observation of ambiguity aversion in this article we propose the comparative ignorance hypothesis according to which ambiguity aversion is produced by a comparison with less ambiguous events or with more knowledgeable individuals this hypothesis is supported in a series of studies showing that ambiguity aversion present in a comparative context in which a person evaluates both clear and vague prospects seems to disappear in a noncomparative context in which a person evaluates only one of these prospects in isolation

higher order expectations in asset pricing we examine formally keynes idea that higher order beliefs can drive a wedge between an asset price and its fundamental value based on expected future payoffs we call this the higher order wedge which depends on the difference between higher and first order expectations of future payoffs we analyze the determinants of this wedge and its impact on the equilibrium price in the context of a dynamic noisy rational expectations model we show that the wedge reduces asset price volatility and disconnects the price from the present value of future payoffs the impact of the higher order wedge on the equilibrium price can be quantitatively large

libertarian paternalism information production and financial decision making we develop a theoretical model to analyze the effects of libertarian paternalism on information production and financial decision making individuals in our model appreciate the information content of the recommendations made by a social planner this affects their incentive to gather information and in turn the speed at which information spreads across market participants via social learning or formal advice channels we characterize situations in which libertarian paternalism improves welfare and contrast them with scenarios in which this policy is suboptimal because of its negative impact on the production and propagation of information the author 2013 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

nudging the poor and the rich a field study on the distributional effects of green electricity defaults abstract choice defaults are an increasingly popular public policy tool yet there is little knowledge of the distributional consequences of such nudges for different groups in society we report results from an elicitation study in the residential electricity market in switzerland in which we contrast consumers actual contract choices under an existing default regime with the same consumers active choices in a survey presenting the same choice set without any default we find that the default is successful at curbing greenhouse gas emissions but it leads poorer households to pay more for their electricity consumption than they would want to while leaving a significant willingness to pay for green electricity by richer households untapped

do institutions promote rationality an experimental study of the three door anomaly the three door problem is an example of a systematic violation of a key rationality postulate that has attracted much attention in this seemingly simple individual decision task most people initially fail to apply correctly bayes law and to make the payoff maximizing choice previous experimental studies have shown that individual learning reduces the incidence of irrational choices somewhat but is far from eliminating it we experimentally study the roles of communication and competition as institutions to mitigate the choice anomaly we show that the three door anomaly can be entirely eliminated by these institutions

reading the fine print information disclosure in the brazilian credit card market consumer credit regulations usually require that lenders disclose interest rates however in the absence of specific prominence requirements lenders can conceal the interest rate in the fine print while still complying with the law i examine the effect of such a strategy using a field experiment in brazil in which a credit card company offered their clients payment plans to pay off their balances using randomized contract interest rates and the degree of rate disclosure i show that most clients are rate sensitive whether or not rates are prominently disclosed the elasticity of payment plan enrollment with respect to the interest rate ranges from 0 711 to 0 880 high risk clients are an exception these clients are rate sensitive only when disclosure is prominent i also show that clients are influenced by nudges that favor longer term contracts conditional on enrollment the proportion of clients who choose a longer term contract is 40 percentage points higher when a longer term contract is feat

self directed pensions gender risk and portfolio choices in this paper i investigate gender differences in financial risk taking from a new perspective and i show that gender plays a different role across the risk distribution to evaluate risk taking i exploit portfolio choices following a reform that entitles almost the entire swedish workforce to choose a risk profile for a part of their public pension contributions the novel finding is that portfolio risk does not differ much between the men and women who choose less risky portfolios while the men who choose risky portfolios take on significantly more risk than do the women who choose risky portfolios the findings are robust to investors choosing the default alternative chasing past returns rebalancing and different measures of risk taking

trade with heterogeneous prior beliefs and asymmetric information no trade theorems have shown that new information will not lead to trade when agents share the same prior beliefs this paper explores the structure of no trade theorems with heterogeneous prior beliefs it is shown how different notions of efficiency under asymmetric information ex ante interim ex post are related to agents prior beliefs as well as incentive compatible and public versions of those efficiency concepts these efficiency results are used to characterize necessary and sufficient conditions on agents beliefs for no trade theorems in different trading environments

asset prices and trading volume in a beauty contest speculators buy an asset hoping to sell it later to investors with higher private valuations if agents are uncertain about the distribution of private valuations and about the beliefs of others about this distribution a beauty contest with an infinite hierarchy of beliefs arises under harsanyi s assumption of a common prior the infinite beliefs hierarchy is readily solved using bayes law this paper shows that common knowledge of the beliefs formation rule mapping the private valuation of each agent into his first order belief also simplifies the beliefs hierarchy while allowing for disagreement among agents we analyse the resulting speculation in a stylized asset market several statistics computed only from readily observable quote return and volume data are evaluated in terms of their power to discriminate between genuine disagreement and the harsanyian case only statistics that relate volume and volatility or volume and changes in best offers have the necessary discriminatory power

pulsation in a competitive model of advertising firm s cost interaction the literature reveals contradiction between theoretical results superiority of uniform policy under a concave advertising response function and empirical results concavity of the advertising response function and the superiority of a pulsation policy to reconcile the above difference this paper offers a resolution based on 1 the concavity of the advertising response function 2 the convexity of the firm s cost function and 3 over advertising the resolution is reached upon maximizing the net profit per unit time over the infinite planning horizon subject to an exogenous advertising budget constraint theoretical results for monopolistic markets are found mostly generalized to competitive markets a numerical example is introduced to gain more insight into the theoretical findings and an approach is introduced and implemented to empirically assess the shape of a firm s cost function and the advertising policy to be employed

predicting advertising pulsing policies in an oligopoly a model and empirical test given that firms pulse in advertising should firms pulse in or out of phase it is shown that out of phase maximizes the oligopoly profits and is also the markov perfect equilibrium of the infinite horizon game the basic intuition for this result comes from the following fact it is more profitable to increase consideration when the competitor s consideration is lower evidence from several product categories seems to support this theoretical result

heterogeneity of beliefs and trade in experimental asset markets we investigate the relationship between traders expectations and market outcomes with experimental asset market data the data show that those who have high price expectations buy more frequently and submit higher bids and those who hold low price expectations sell more frequently and submit lower bids traders who have more accurate expectations achieve greater earnings simulations using only belief data reproduce the pricing patterns observed in the market well indicating that the heterogeneity of expectations is a key to explaining market activity

why does the law of one price fail an experiment on index mutual funds we conduct an experiment to evaluate why individuals invest in high fee index funds in our experiments subjects allocate 10 000 across four s p 500 index funds and are rewarded for their portfolio s subsequent return subjects overwhelmingly fail to minimize fees we can reject the hypothesis that subjects buy high fee index funds because of bundled non portfolio services search costs for fees matter but even when we eliminate these costs fees are not minimized instead subjects place high weight on annualized returns since inception fees paid decrease with financial literacy interestingly subjects who choose high fee funds sense they are making a mistake

genetic variation in financial decision making individuals differ in how they construct their investment portfolios yet empirical models of portfolio risk typically account only for a small portion of the cross sectional variance this paper asks whether genetic variation can explain some of these individual differences following a major pension reform swedish adults had to form a portfolio from a large menu of funds we match data on these investment decisions with the swedish twin registry and find that approximately 25 of individual variation in portfolio risk is due to genetic variation we also find that these results extend to several other aspects of financial decision making

on the superiority of pulsing under a concave advertising market potential function abstract the authors study the superiority of advertising pulsing policy turning advertising on and off in a cyclic fashion over its uniform constant spending counterpart that costs the same under the assumption that sales dynamics follow a modified vidale wolfe aggregate advertising model the authors show that pulsing can be superior if the product of the concave market potential function and the linear or concave advertising response function is convex in advertising similar to previous studies in the literature the average undiscounted profit over the infinite planning horizon is considered as a performance measure according to which alternative advertising pulsation policies are compared employing a well known data set relating advertising to sales the above convexity requirement is empirically supported and the superiority of pulsing is established numerically the performance of the proposed model is found to be superior to two rival models using a one step ahead forecasting procedure the analytical findings of the study are documented into six theoretical results for which proofs are relegated to a separate appendix managerial implications of the study and directions for future research are also discussed

health insurance choice and risk preferences under cumulative prospect theory an experiment we investigate how consumers choose insurance contracts when using a measure of decision quality based on individual risk preferences for this we use a laboratory experiment with a sequential design first subjects face insurance choices then we elicit risk preferences allowing for different latent decision making theories i e cumulative prospect theory and expected utility theory we find that the vast majority are cumulative prospect theory types analyzing whether subjects choose contracts consistent with their risk preferences we find that about 14 of all participants show inconsistent behavior and low decision quality yet the majority shows consistent behavior and good decision quality our results suggest that one explanation for inconsistent choices is the application of heuristics

public policy markets and household coping strategies in bangladesh avoiding a food security crisis following the 1998 floods abstract at their peak the 1998 floods covered two thirds of bangladesh causing severe damage to the major rice crop and threatening the food security of tens of millions of households in this paper we first highlight the contribution of government policy interventions including trade liberalization in the early 1990s to stabilization of rice markets during and after the flood then using a panel data set covering 750 households in three rounds over a 13 month period we analyze impacts of the flood on household assets consumption and nutritional outcomes finally we present empirical estimates of the contribution of rice market stabilization and government transfers to household food consumption

forecasting the forecasts of others implications for asset pricing we develop a dynamic asset pricing model with heterogeneously informed agents unlike previous research we focus on the general case where differential information leads to the problem of forecasting the forecasts of others and to non trivial dynamics of higher order expectations in particular we prove that the model does not admit a finite number of state variables using numerical analysis we compare equilibria characterized by identical fundamentals but different information structure we demonstrate that the distribution of information has substantial impact on equilibrium prices and returns in particular we show that asymmetric information can generate momentum in returns and high trading volume

differential interpretation of information in inflation forecasts we test the hypothesis associated with a standard assumption in the theoretical literature on learning that economic agents interpret information identically we use a data set based on a survey o

daily momentum and contrarian behavior of index fund investors we use a two year panel of individual accounts in an s p 500 index mutual fund to examine the trading and investment behavior of more than 91 000 investors who have chosen a low cost passively managed vehicle for savings we identify classes of momentum investors and contrarian investors we use these classes to build up behavioral factors based on contrarian and momentum flows and we show that they are relevant for pricing they perform well against a benchmark of loadings on latent factors extracted from returns

averting a food crisis private imports and public targeted distribution in bangladesh after the 1998 flood abstract the 1998 flood in bangladesh caused a shortfall of 2 2 million tonnes mill t in the rice production and threatened the food security of tens of millions of households despite the best efforts of donors and the government the public distribution of rice and wheat was only 188 000 t more than originally planned for july 1998 to april 1999 however a major food crisis was averted as private imports made possible by trade liberalisation in the early 1990s stabilised market prices and supplies the government s direct distribution programs though small compared to private imports nonetheless increased access to food by poor households household survey data indicate that immediate relief efforts were well targeted to flood affected households as were transfers from ngos vulnerable group feeding vgf a medium term program was not targeted well to households directly exposed to the flood though the program was relatively well targeted to poor households more broadly the bangladesh experience with the 1998 flood shows that in a liberalised trade regime where private imports respond to price signals food aid s contribution to the total availability of food may be minimal however foreign assistance in kind or in cash can provide resources for subsidised targeted distribution to food insecure households assistance not possible otherwise under tight government budget constraints

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

on the asset allocation of a default pension fund we characterize the optimal default fund in a dened contribution dc pension plan using detailed data on individuals and their holdings inside and outside the pension system we nd substantial heterogeneity among default investors in terms of labor income nancial wealth and stock market participation we build a life cycle consumption savings model incorporating a dc pension account and realistic investor heterogeneity we examine the optimal asset allocation for dierent realized equity returns and investors and compare it with age based investing the optimal asset allocation leads to less inequality in pensions while it moderates the risks through active rebalancing

nature or nurture what determines investor behavior abstract using data on identical and fraternal twins complete financial portfolios we decompose the cross sectional variation in investor behavior we find that a genetic factor explains about one third of the variance in stock market participation and asset allocation family environment has an effect on the behavior of young individuals but this effect is not long lasting and disappears as an individual gains experience frequent contact among twins results in similar investment behavior beyond a genetic factor twins who grew up in different environments still display similar investment behavior our interpretation of a genetic component of the decision to invest in the stock market is that there are innate differences in factors affecting effective stock market participation costs we attribute the genetic component of asset allocation the relative amount invested in equities and the portfolio volatility to genetic variation in risk preferences

speculative equilibrium with differences in higher order beliefs modest differences in higher order beliefs may have large price effects we generalize a standard rational expectations equilibrium model with different information by allowing differences in higher order beliefs investors have possibly different dogmatic beliefs about the mean different dogmatic beliefs about other investors beliefs and so on for higher and higher orders of beliefs even when every investor s first order expectations are unbiased overvaluation results when investors have inconsistent higher order beliefs that their own expectations are more optimistic than average this lack of common knowledge destabilizes prices in an unbounded manner as market liquidity disappears this paper was accepted by gustavo manso finance

optimal advertising strategies this paper considers advertising policies for a very general class of response functions it is shown that if a pulsing policy is used awareness or sales eventually settle down to a steady cycle and the average response over the cycle is a decreasing function of the length of the cycle when response shows increasing returns to scale it is possible in theory to use a device called chattering to replace the true response by a straight line which lies above the true response in the region in which chattering is used a numerical example is given to show how the optimal policy can be computed when part of the response is linear and the results obtained are compared with those of the best practicable approximation to chattering it is shown that the problem of maximising awareness or sales subject to a budget constraint is structurally identical with maximising profit after advertising with or without a constraint in either case it is possible that for part of the time the optimal policy involves chattering

how do individual accounts work in the swedish pension system in 1998 sweden introduced a second tier of mandatory individual accounts in the public pension system this paper examines investment choice in the swedish individual account scheme focusing on two aspects of the investment decision do workers with high risk in their human capital diversify their overall portfolio by investing their pension funds in low risk funds and to what extent do participants exhibit home bias and invest in swedish assets two pieces of evidence support rational investment decisions first we establish a positive relationship between income and the level of risk second married participants appear to pool their risks on the other hand the results show that participants at the bottom of the income distribution take on as much risk as those at the top indicating that they are not diversifying their overall portfolio finally participants employed in sectors that are affected by foreign competition are less likely to diversify their portfolios and invest in foreign assets compared to the public sector instead these workers exhibit home bias in their investments jel g11 h55

designed to fail effects of the default option and information complexity on student loan repayment abstract within five years of leaving school 25 of student loan borrowers default on required minimum payments these defaults are costly they add to interest and penalties on loans and lower credit scores which limits access to future credit and can adversely affect job prospects we ask why so few student loan borrowers enroll in income driven repayment idr plans which insure against default caused by low earnings to do so we run an incentivized laboratory experiment using a facsimile of the government s student loan exit counseling website we test the roles information complexity uncertainty about earnings and the default option play we find that switching the default option from the standard plan with fixed minimum payments to an idr with income contingent minimum payments and providing good information about earnings can dramatically decrease choice of the risky standard plan

presidential address does finance benefit society academics view of the benefits of finance vastly exceeds societal perception this dissonance is at least partly explained by an underappreciation by academia of how without proper rules finance can easily degenerate into a rent seeking activity i outline what finance academics can do from a research point of view and from an educational point of view to promote good finance and minimize the bad

design choices in privatized social security systems learning from the swedish experience in the 2000 u s presidential campaign george w bush advocated a partial privatization of the social security system according to his plan a portion of the payroll tax would be designated for individual savings accounts at the same time as this issue was being debated in the united states sweden was in the process of launching a system that is very similar to president bush s proposal although bush s plan did not get much attention in the early years of his administration the proposal may resurface either in the united states or in other countries if so important lessons can be learned from the swedish experience in particular the swedish plan adopted an interesting mix of design choices that can now be evaluated based on three years of post implementation experience although there is a large literature in economics on the design of social security systems most of that literature is concerned with macroeconomic considerations such as funding in contrast there has been much less attention devoted to the details of how plans might be designed in part because these details do not seem important from a standard economic perspective in this paper we reverse this usual pattern and focus our attention on the design aspects of the swedish plan we find that although most of the design choices are those that might be approved by most economists in some cases these choices produced undesirable consequences

are we taxing ourselves how deliberation and experience shape voting on taxes abstract we let consumers vote on tax regimes in experimental markets we test if taxes on sellers are more popular than taxes on consumers i e on voters themselves even if taxes on sellers are inefficiently high taxes on sellers are more popular if voters underestimate the extent of tax shifting in the market we show that inexperienced voters are prone to such a tax shifting bias that experience is an effective de biasing mechanism but that pre vote deliberation about tax regimes makes initially held opinions more extreme rather than correct our results suggest that voting on taxes is prone to bias and that easy to interpret facts are needed to de bias voters

rational expectations equilibrium with econometric models we prove the existence of general economic equilibrium under uncertainty when agents form econometric models of the relationship among their private information prices and the state of the environment the functional form of each agent s model is specified in advance with a finite number of parameters to be determined agents are then thought of as performing linear least squares estimation of the parameters equilibrium requires not only that markets clear but also that each agent be using the vector of parameter values which within a compact convex set of parameters gives the least squares best fit to the data that is generated by the working of the economy when agents adhere to their models

on continuous time optimal advertising under s shaped response continuous time monopolistic models of advertising expenditure that rely on strict response concavity have been shown to prescribe eventual spending at a constant rate however analyses of discrete analogs have suggested thats shaped response convexity for low expenditure levels may allow for the periodic optima encountered in actual practice casting the dynamic between advertising and sales in a common format an autonomous first order relationship the present paper explores extensions along three dimensions an s shaped response function the value of the discount rate and the possibility of diffusion like response supplementing the treatment by mahajan and muller 1986 a flexible class of s shaped response models is formulated for which it is demonstrated that in contrast to findings in the literature on discretized advertising models continuous periodic optima cannot be supported further a set of conditions on the advertising response function are derived that contains and extends that suggested by sasieni 1971 collectively these results both suggest a set of baseline properties that reasonable models should possess and cast doubt on the ability of first order models to capture effects of known managerial relevance

chapter 9 econometric and time series market response models publisher summary marketing has seen a rapid expansion in the widespread use of quantitative methods correlation and regression analysis were among the first techniques used as marketing research emerged as a discipline after world war ii in the early 1970s regression analysis became econometrics simultaneous equation systems could be estimated almost as easily as single regression equations while econometrics as a whole continues to flourish as new and more sophisticated estimation techniques and associated computer software have become available simultaneous equation systems have not become widely prevalent the dynamic structure of marketing variables themselves is addressed in the chapter followed by discussions of leads and lags among marketing variables and the assessment of the direction of causality dynamic properties of sales response functions have been discussed in more detail marketing generalizations that have been uncovered as well as empirical evidence on the shape of the sales response function is reported

beauty contests and iterated expectations in asset markets in a financial market where traders are risk averse and short lived and prices are noisy asset prices today depend on the average expectation today of tomorrow s price thus iterating this relationship the date 1 price equals the date 1 average expectation of the date 2 average expectation of the date 3 price this will not in general equal the date 1 average expectation of the date 3 price we show how this failure of the law of iterated expectations for average belief can help understand the role of higher order beliefs in a fully rational asset pricing model and explain over reaction to noisy public information

finite bubbles with short sale constraints and asymmetric information abstract we present a finite period general equilibrium model of an exchange economy with asymmetric information we say that a rational expectations equilibrium exhibits a strong bubble if the price is higher than the dividend with probability one we show that necessary conditions for a strong bubble to occur are that 1 each agent must have private information in the period and state in which the bubble occurs 2 each agent must be short sale constrained at some period in the future with positive probability and 3 agents trades are not common knowledge we present examples of bubbles when the necessary conditions are satisfied journal of economic literature classification numbers c72 d52 d82 d84 g12 g14

polarization and ambiguity we oer a theory of polarization as an optimal response to ambiguity suppose individual a s beliefs rst order stochastically dominate individual b s they observe a common signal they exhibit polarization if a s posterior dominates her prior and b s prior dominates her posterior given agreement on conditional signal likelihoods we show that polarization is impossible under bayesian updating or after observing extreme signals however we also show that polarization can arise after intermediate signals as ambiguity averse individuals implement their optimal prediction strategies we explore when this polarization will occur and the logic underlying it some previous versions of this paper had the title ambiguity dynamic consistency

the more we know about the fundamental the less we agree on the price i allow trading horizon heterogeneity across groups in a standard differential information model of a financial market this approach can explain the well established phenomenon that after a public announcement trading volume increases more private information is incorporated into prices and volatility increases in such environments public information has the important secondary role of helping agents learn about the information of other agents therefore whenever the correlation between the private information of different groups is sufficiently low a public announcement increases disagreement among short horizon traders regarding the expected selling price even as it decreases disagreement about the fundamental value of the asset additional testable implications are also suggested

planning media schedules in the presence of dynamic advertising quality a key task of advertising media planners is to determine the best media schedule of advertising exposures for a certainbudget conceptually the planner could choose to do continuous advertising i e schedule ad exposures evenly overall weeks or follow a strategy of pulsing i e advertise in some weeks of the year and not at other times previous theoretical analyses have shown that continuous advertising is optimal for nearly all situations however pulsing schedules are very common in practice either the pract ice of pulsing is inappropriate or extant models have not adequately conceptualized the effects of advertising spending over time this paper offers a model that shows pulsing strategies can generate greater total awareness than the continuous advertising when the effectiveness of advertisement i e adquality varies overtime specifically ad quality declines because of advertising wearout during periods of continuous advertising and it restores due to forgetting effects during periods of no advertising such dynamics make it worth while for advertisers to stop advertising when ad quality becomes very low and wait for ad quality to restore beforestarting the next burst again as is common in practice based on the extensive behavioral research on advertising repetition and advertising wearout we extend the classical nerlove and arrow 1962 model by incorporating the notions of repetition wearout copy wearout and ad quality restoration repetition wearout is a result of excessive frequency beca use ad viewers perceive that there is nothing new to be gained from processing the ad they withdraw their attention or they become unmotivated to react to advertising information copy wearout refers to the decline inad quality due to passage of time independent of the level of frequency ad quality restoration is the enhancement of ad quality during media hiatus as a consequence of viewers forgetting the details of the advertised messages thus making ads appear like new when reintroduced later the proposed model has the property that when wearout effects are present a strategy of pulsing is superior to continuous advertising even when the advertising response function is concave this is illustrated by a numerical example that compares the total awareness generated by a single concentrated pulse of varying duration blitz schedules and continuous advertising the even schedule this property can be explained by the tension between the pressure to spend the fixed media budget quickly to avoid copy wearout and the opposing pressure to spread out the media spending over time to mitigate repetition wearout the proposed model is empirically tested by using brand level data from two advertising awareness tracking studies that also include the actual spen ding schedules the first data set is for a major cereal brand while the other is for a brand of milk chocolate such advertising tracking studies are now a common and popular means for evaluating advertising effectiveness in many markets e g millward brown narketmind in the empirical tests the model parameters are estimated by using the kalman filter procedure which is eminently suited for dynamic models because it attends to the intertemporal dependencies in awareness build up and decay via the use of conditional densities the estimated parameters are statistically significant have the expected signs and are meaningful from both theoretical and managerial viewpoints the proposed model fits both the data sets rather well and better than several well known advertising models namely the vidale wolfe brandaid litmus and trackermodels but not decisively better than the nerlove arrow model however unlike the nerlove arrow model the proposed model yields different total awareness for different strategies of spending the same fixed budget thus allowing media planners to discriminate among several media schedules given the empirical support for the model the paper presents an implementable approach for utilizing it to evaluate large numbers of alternative media schedules and determine the best set of media schedules for consideration in media planning this approach is based on an algorithm that combines a genetic algorithm with the kalman filter procedure the paper presents the results of applying this approach in the case studies of the cereal and milk chocolate brands the form of the best advertising spending strategies in each case was a pulsing strategy and there were many schedules that were an improvement over the media schedule actually used in each campaign

dissecting the monty hall anomaly we assess competing explanations of irrational behavior in the monty hall problem by creating new variants of the problem some variants employ a feature that automates the merging of probabilities thus rendering transparent the probabilistic advantage of the rational choice that feature also enables systematic variation in informational asymmetry and in ordering of actions data from 77 subjects each of whom makes 30 binary decisions indicate that automated merging raises the fraction of rational choices from around 40 to over 80 other features examined have much less impact indicating the importance of a bayesian updating failure jel c91 d02 d81 d83

how are preferences revealed revealed preferences are tastes that rationalize an economic agent s observed actions normative preferences represent the agent s actual interests it sometimes makes sense to assume that revealed preferences are identical to normative preferences but there are many cases where this assumption is violated we identify five factors that increase the likelihood of a disparity between revealed preferences and normative preferences passive choice complexity limited personal experience third party marketing and intertemporal choice we then discuss six approaches that jointly contribute to the identification of normative preferences structural estimation active decisions asymptotic choice aggregated revealed preferences reported preferences and informed preferences each of these approaches uses consumer behavior to infer some property of normative preferences without equating revealed and normative preferences we illustrate these issues with evidence from savings and investment outcomes

decision bias in the newsvendor problem with a known demand distribution experimental evidence in the newsvendor problem a decision maker orders inventory before a one period selling season with stochastic demand if too much is ordered stock is left over at the end of the period whereas if too little is ordered sales are lost the expected profit maximizing order quantity is well known but little is known about how managers actually make these decisions we describe two experiments that investigate newsvendor decisions across different profit conditions results from these studies demonstrate that choices systematically deviate from those that maximize expected profit subjects order too few of high profit products and too many of low profit products these results are not consistent with risk aversion risk seeking preferences prospect theory preferences waste aversion stockout aversion or the consequences of underestimating opportunity costs two explanations are consistent with the data one subjects behave as if their utility function incorporates a preference to reduce ex post inventory error the absolute difference between the chosen quantity and realized demand two subjects suffer from the anchoring and insufficient adjustment bias feedback and training did not mitigate inventory order errors we suggest techniques to improve decision making

trade liberalization and national food security rice trade between bangladesh and india abstract following a poor harvest in late 1997 and a massive flood in 1998 private sector traders in bangladesh imported several million metric tons of rice from india this paper presents evidence that this trade made possible by separate trade liberalizations in india and bangladesh in the early 1990s augmented domestic supplies and stabilized prices in bangladesh at import parity levels letters of credit data indicating the participation of hundreds of importers and a close correlation of price movements across the two countries suggest that the trade was competitive a risk of co incident crop shortfalls in the two countries remains though these have occurred rarely in the past two decades bangladesh imports from alternative sources would also enhance food availability if another production shortfall occurs but these imports face higher transport costs and would involve far fewer importing firms given the economies of scale of shipments by sea the positive contribution of trade liberalization to short run food security in bangladesh in recent years does not minimize the importance of increased agricultural productivity and rural economic growth to provide rural poor households with sufficient incomes to acquire food nonetheless the bangladesh experience shows that trade liberalization offers potential benefits for national food security by enabling a rapid increase of food supplies following domestic production shortfalls

on the generalizability of advertising pulsation monopoly results to an oligopoly this paper introduces for the first time an analytical framework for modeling and analyzing sales response to advertising pulsation for competitive markets of mature products in continuous time for discrete piecewise policies that allow unequal cycle lengths employing a nash equilibrium solution concept this study supported with numerical analysis demonstrates that there is an oligopolistic as opposed to a monopolistic justification for advertising at a constant rate in the presence of concave response functions or advertising according to a pulsing policy in the presence of s shaped response functions the article employs a modeling framework whereby each of a set of competitors responses to advertising spending is governed mainly by lanchester type response is used to analyze the game resulting from cyclical advertising policies that are strictly adhered to by all players a non discounted averaged performance is used to assess the purported optimality of different variants of piecewise constant policies

speculative overpricing in asset markets with information flows in this paper we derive and experimentally test a theoretical model of speculation in multiperiod asset markets with public information flows the speculation arises from the traders heterogeneous posteriors as they make different inferences from sequences of public information this leads to overpricing in the sense that price exceeds the most optimistic belief about the real value of the asset we find evidence of speculative overpricing in both incomplete and complete markets where the information flow is a gradually revealed sequence of imperfect public signals about the state of the world we also find evidence of asymmetric price reaction to good news and bad news another feature of equilibrium price dynamics under our model markets with a relaxed short sale constraint exhibit less overpricing

food aid domestic policy and food security contrasting experiences from south asia and sub saharan africa abstract food aid both for short term emergency relief and as program food aid that helps address medium term food deficits is often a major component of food security strategies in developing countries this study reviews the experience with food aid of four major recipients of food aid india bangladesh ethiopia and zambia regarding food production trade markets consumption and safety nets as well as the policy responses to food emergencies the widely varying experiences of the study countries suggest that food aid that supports building of production and market enhancing infrastructure is timed to avoid adverse price effects on producers and is targeted to food insecure households can play a positive role in enhancing food security however food aid is not the only or in many cases the most efficient means of addressing food insecurity in many cases private markets can more effectively address shortfalls in food availability and cash transfers may be a viable alternative to food transfers in kind

optimal defaults and active decisions defaults often have a large influence on consumer decisions we identify an overlooked but practical alternative to defaults requiring individuals to make an explicit choice for themselves we study such active decisions in the context of 401 k saving we find that compelling new hires to make active decisions about 401 k enrollment raises the initial fraction that enroll by 28 percentage points relative to a standard opt in enrollment procedure producing a savings distribution three months after hire that would take 30 months to achieve under standard enrollment we also present a model of 401 k enrollment and derive conditions under which the optimal enrollment regime is automatic enrollment i e default enrollment standard enrollment i e default non enrollment or active decisions i e no default and compulsory choice active decisions are optimal when consumers have a strong propensity to procrastinate and savings preferences are highly heterogeneous financial illiteracy however favors default enrollment over active decision enrollment