Cary Deck

Fight or Flight? Defending against Sequential Attacks in the Game of Siege

This paper examines theory and behavior in a two-player game of siege, sequential attack and defense. The attacker’s objective is to successfully win at least one battle while the defender’s objective is to win every battle. Theoretically, the defender either folds immediately or, if his valuation is sufficiently high and the number of battles is sufficiently small, then he has a constant incentive to fight in each battle. Attackers respond to defense with diminishing assaults over time. Consistent with theoretical predictions, our experimental results indicate that the probability of successful defense increases in the defenders valuation and it decreases in the overall number of battles in the contest. However, the defender engages in the contest significantly more often than predicted and the aggregate expenditures by both parties exceed predicted levels. Moreover, both defenders and attackers actually increase the intensity of the fight as they approach the end of the contest.

Age Effects and Heuristics in Decision Making

Using controlled experiments, we examine how individuals make choices when faced with multiple options. Choice tasks are designed to mimic the selection of health insurance, prescription drug, or retirement savings plans. In our experiment, available options can be objectively ranked, allowing us to examine optimal decision making. First, the probability of a person selecting the optimal option declines as the number of options increases, with the decline being more pronounced for older subjects. Second, heuristics differ by age, with older subjects relying more on suboptimal decision rules. In a heuristics validation experiment, older subjects make worse decisions than younger subjects.

Double Bubbles in Assets Markets with Multiple Generations

We construct an asset market in a finite horizon overlapping-generations environment. Subjects are tested for comprehension of their fundamental value exchange environment and then reminded during each of 25 periods of the environments declining new value. We observe price bubbles forming when new generations enter the market with additional liquidity and bursting as old generations exit the market and withdrawing cash. The entry and exit of traders in the market creates an M shaped double bubble price path over the life of the traded asset. This finding is significant in documenting that bubbles can reoccur within one extended trading horizon and, consistent with previous cross-subject comparisons, shows how fluctuations in market liquidity influence price paths. We also find that trading experience leads to price expectations that incorporate fundamental value.

Consistency of Higher Order Risk Preferences

Risk aversion (a 2nd order risk preference) is a time-proven concept in economic models of choice under risk. More recently, the higher order risk preferences of prudence (3rd order) and temperance (4th order) also have been shown to be quite important. While a majority of the population seems to exhibit both risk aversion and such higher-order risk preferences, a significant minority does not. Rather than simply dismissing this behavior, we show how both risk-loving as well as risk-averse behaviors might be generated by a simple type of basic lottery preference for either (1) combining “good” outcomes with “bad” ones, or (2) combining “good with good” and “bad with bad.” We further show that this dichotomy is fairly robust at explaining higher order risk attitudes in the laboratory. In addition to our own experimental evidence, we take a second look at the extant laboratory experiments that measure higher order risk preferences and we find a fair amount of support for this dichotomy. Our own experiment is the first to look beyond 4th order risk preferences and we examine risk attitudes at even higher levels. The consistency of these results with expected utility theory and with a few non-expected utility theories is also examined.

Prediction Markets in the Laboratory

The idea that there is wisdom from the collective has been forcefully described in “The Wisdom of the Crowds” by James Surowiecki, who argues that the aggregation of information in groups results in better decisions than those that are afforded by any single member of the group. Markets, like opinion polls, are one mechanism for aggregating disparate pieces of information. The aggregation properties of prices were first noted by Hayek (1945) and were formally examined by Muth (1961). In particular, Hayek argues that market prices serve the purpose of sharing and coordinating local and personal knowledge, while Muth shows that markets do not waste information and that the current price contains all the information available from market participants.

The Effectiveness of Low Price Matching in Mitigating the Competitive Pressure of Low Friction Electronic Markets

The conventional wisdom is that Internet commerce substantially reduces the transaction costs for comparison shopping, which in turn intensifies price competition. However, the technology of the Internet marketplace offers retailers tools with the potential to blunt some of this competition. This paper explores the competitive impact of an electronic low price matching policy when firms can track customer search behavior. Using controlled laboratory techniques, we find that through the use of low price matching sellers are able to dampen some of the intense competition spawned when a large proportion of consumers comparison shop.

Risk-Taking Behavior: An Experimental Analysis of Individuals and Dyads

The decision to undertake risk is often made by pairs (dyads), while much of the economics literature on risk taking focuses on the individual. We report the results of controlled laboratory experiments that compare behavior between individuals and pairs. Using the Holt and Laury (2002) procedure and a within-subjects design, we find that pair choices are largely consistent with subjects bargaining over the outcome rather than the pairs taking a more extreme stance than the individual members. Further, gender and age but not personality seem to influence relative bargaining weight. We also find that individuals are more willing to take risks after making decisions as part of a pair than beforehand. Both the personality of ones partner and nontask social interaction influence subsequent individual risk-taking behavior.

An Experimental Analysis of Dynamic Incentives to Share Knowledge

Knowledge sharing arrangements are an important part of the innovation process as they help firms acquire technological capabilities, shorten development time, and spread risk and cost. A question central to the study of knowledge sharing arrangements is the impact of competition on cooperation. While cooperation has the benefit of avoiding duplication, it may have an adverse effect on the competitive advantage of a leading firm. Hence, firms face a difficult challenge during the innovation process while deciding which components of it, if any, to carry out in collaboration with other firms. This paper reports the results of controlled laboratory experiments which identify how the decision to form research joint ventures changes with both relative progress during the R&D process and the intensity of product market competition. The design is based on a modified version of Erkal and Minehart (2008). The results indicate that if expected profits are such that the lagging firms always stay in the race, cooperation unravels as firms move forward in the discovery process and as monopoly profits become relatively more attractive. These results are generally consistent with the theoretical predictions.

Reducing Choice Overload without Reducing Choices

Previous studies have demonstrated that a multitude of options can lead to choice overload, reducing decision quality. Through controlled experiments, we examine sequential choice architectures that enable the choice set to remain large while potentially reducing the effect of choice overload. A specific tournament-style architecture achieves this goal. An alternate architecture in which subjects compare each subset of options to the most preferred option encountered thus far fails to improve performance due to the status quo bias. Subject preferences over different choice architectures are negatively correlated with performance, suggesting that providing choice over architectures might reduce the quality of decisions.

Investing versus gambling: experimental evidence of multi-domain risk attitudes

Economists have noted the empirical regularity that an individual’s attitude towards risk is not constant across elicitation settings. Such a pattern is conceptually consistent with the argument in psychology that risk is domain specific. To explore this view, we frame a common risk elicitation tool in laboratory experiments as both a gambling game and an investment opportunity. A survey instrument used to measure one’s attitudes towards risks on different domains is found to explain partially within-subject variation in observed behaviour between the two tasks. The evidence presented in this article demonstrates the need to consider more nuanced approaches to modelling risk.