Charles N. Noussair

Nonspeculative bubbles in experimental asset markets: Lack of common knowledge of rationality vs. actual irrationality

We report the results of an experiment designed to study the role of speculation in the formation of bubbles and crashes in laboratory asset markets. In a setting in which speculation is not possible, bubbles and crashes are observed. The results suggest that the departures from fundamental values are not caused by the lack of common knowledge of rationality leading to speculation, but rather by behavior that itself exhibits elements of irrationality. Much of the trading activity that accompanies bubble formation, in markets where speculation is possible, is due to the fact that there is no other activity available for participants in the experiment.

Do Consumers Not Care about Biotech Foods or Do They Just Not Read the Labels

This paper uses experimental econoic methods to present evidence that the absence of a negative effect on demand in reaction to products containing GMOs is in large measure due to the fact that customers do not notice the labelling.

From Bad to Worse: Striatal Coding of the Relative Value of Painful Decisions

The majority of decision-related research has focused on how the brain computes decisions over outcomes that are positive in expectation. However, much less is known about how the brain integrates information when all possible outcomes in a decision are negative. To study decision-making over negative outcomes, we used fMRI along with a task in which participants had to accept or reject 50/50 lotteries that could result in more or fewer electric shocks compared to a reference amount. We hypothesized that behaviorally, participants would treat fewer shocks from the reference amount as a gain, and more shocks from the reference amount as a loss. Furthermore, we hypothesized that this would be reflected by a greater BOLD response to the prospect of fewer shocks in regions typically associated with gain, including the ventral striatum and orbitofrontal cortex. The behavioral data suggest that participants in our study viewed all outcomes as losses, despite our attempt to induce a status quo. We find that the ventral striatum showed an increase in BOLD response to better potential gambles (i.e., fewer expected shocks). This lends evidence to the idea that the ventral striatum is not solely responsible for reward processing but that it might also signal the relative value of an expected outcome or action, regardless of whether the outcome is entirely appetitive or aversive. We also find a greater response to worse gambles in regions previously associated with aversive valuation, suggesting an opposing but simultaneous valuation signal to that conveyed by the striatum.

Equilibria in a multi-object uniform price sealed bid auction with multi-unit demands*

SummaryIn many existing markets demanders wish to buy more than one unit from a group of identical units of a commodity. Often, the units are sold simultaneously by auction. The vast majority of literature pertaining to the economics of auctions, however, considers environments in which demanders buy at most one object. In this paper we derive necessary and sufficient conditions for a set of bidding strategies to be a symmetric monotone Bayes-Nash equilibrium to a uniform price sealed bid auction using the “first rejected bid pricing rule” in an independent private values environment with two-unit demands. In any symmetric monotone Bayes-Nash equilibrium, all bidders submit one bid equal to their higher valuation and one bid lower than their lower valuation. We characterize the equilibrium and derive the exact amount of underrevelation in the lower bid.

Futures Markets And Bubble Formation In Experimental Asset Markets

We construct asset markets of the type studied in Smith et al. (1988) , in which price bubbles and crashes are widely observed. In addition to a spot market, there are futures markets in operation, one maturing at the beginning of each period of the life of the asset. We find that when futures markets are present, bubbles do not occur in the spot markets. The futures markets seem to reduce the speculation and the decision errors that appear to give rise to price bubbles in experimental asset markets. Copyright 2006 Blackwell Publishing Ltd

Voting on punishment systems within a heterogeneous group

We consider a voluntary contributions game, in which players may punish others after contributions are made and observed. The productivity of contributions, as captured in the marginal-per-capita return, differs among individuals, so that there are two types: high and low productivity. Every two or eight periods, depending on the treatment, individuals vote on a punishment regime, in which certain individuals are permitted, but not required, to have punishment directed toward them. The punishment system can condition on type and contribution history. The results indicate that the most effective regime, in terms of contributions and earnings, is one that allows punishment of low contributors only, regardless of productivity. Nevertheless, only a minority of sessions converge to this system, indicating a tendency for the voting process to lead to suboptimal institutional choice.

Expert Financial Advice Neurobiologically ''Offloads'' Financial Decision-Making under Risk

Background Financial advice from experts is commonly sought during times of uncertainty. While the field of neuroeconomics has made considerable progress in understanding the neurobiological basis of risky decision-making, the neural mechanisms through which external information, such as advice, is integrated during decision-making are poorly understood. In the current experiment, we investigated the neurobiological basis of the influence of expert advice on financial decisions under risk. Methodology/Principal Findings While undergoing fMRI scanning, participants made a series of financial choices between a certain payment and a lottery. Choices were made in two conditions: 1) advice from a financial expert about which choice to make was displayed (MES condition); and 2) no advice was displayed (NOM condition). Behavioral results showed a significant effect of expert advice. Specifically, probability weighting functions changed in the direction of the experts advice. This was paralleled by neural activation patterns. Brain activations showing significant correlations with valuation (parametric modulation by value of lottery/sure win) were obtained in the absence of the experts advice (NOM) in intraparietal sulcus, posterior cingulate cortex, cuneus, precuneus, inferior frontal gyrus and middle temporal gyrus. Notably, no significant correlations with value were obtained in the presence of advice (MES). These findings were corroborated by region of interest analyses. Neural equivalents of probability weighting functions showed significant flattening in the MES compared to the NOM condition in regions associated with probability weighting, including anterior cingulate cortex, dorsolateral PFC, thalamus, medial occipital gyrus and anterior insula. Finally, during the MES condition, significant activations in temporoparietal junction and medial PFC were obtained. Conclusions/Significance These results support the hypothesis that one effect of expert advice is to “offload” the calculation of value of decision options from the individuals brain.

Neurobiological regret and rejoice functions for aversive outcomes.

A decision maker may experience regret when a choice he makes results in a more adverse outcome than a different choice would have yielded. Analogously, he may experience rejoice when his choice resulted in better outcomes. We used fMRI to investigate the neural correlates of regret and rejoice where payoffs are in terms of a non-monetary medium. Incentives were created using painful outcomes in the form of mild electrical shocks to the foot and the possibility of avoiding them. We hypothesized that the neural response to a painful outcome resulting from an individuals choice would also reflect the degree of regret as measured by the likelihood that alternative choices would have yielded the same adverse outcome. Similarly, when an individual avoids a potential shock, he would experience a degree of rejoice that correlates with the probability he had of receiving the shock. For example, winning a bet when winning was unlikely, even if the outcome is the same, evokes more rejoice than winning when it was highly probable. Our results suggest that activation of a cortical network, consisting of the medial orbitofrontal cortex, left superior frontal cortex, right angular gyrus, and left thalamus, correlates with the degree of regret. A different network, including the rostral anterior cingulate, left hippocampus, left ventral striatum, and brain stem/midbrain correlated with rejoice. The right inferior orbitofrontal cortex, pre-supplementary motor area, anterior cingulate, and posterior cingulate showed similar patterns of activation with both regret and rejoice, suggesting that these regions may be associated with surprise from the realization of relatively unlikely events. Our results suggest that distinct, but overlapping networks are involved in the experiences of regret and rejoice.

Nonlinear neurobiological probability weighting functions for aversive outcomes

While mainstream economic models assume that individuals treat probabilities objectively, many people tend to overestimate the likelihood of improbable events and underestimate the likelihood of probable events. However, a biological account for why probabilities would be treated this way does not yet exist. While undergoing fMRI, we presented individuals with a series of lotteries, defined by the voltage of an impending cutaneous electric shock and the probability with which the shock would be received. During the prospect phase, neural activity that tracked the probability of the expected outcome was observed in a circumscribed network of brain regions that included the anterior cingulate, visual, parietal, and temporal cortices. Most of these regions displayed responses to probabilities consistent with nonlinear probability weighting. The neural responses to passive lotteries predicted 79% of subsequent decisions when individuals were offered choices between different lotteries, and exceeded that predicted by behavior alone near the indifference point.

The Principles of Exchange Rate Determination in an International Financial Experiment

This paper reports the first experiments designed to explore the behavior of economies with prominent features of international finance. Two “countries,” each with its own currency, were created. International trade could take place only through the operation of markets for currency. The law of one price and the flow of funds theory of exchange rate determination were used to produce general equilibrium models that captured much of the behavior of the economies. Prices of goods, as well as the exchange rate, evolve over time toward the predictions of the models. However, both the law of one price and purchasing power parity can be rejected for reasons that do not appear in the literature. Patterns of international trade were as predicted by the law of comparative advantage.