Ganna Pogrebna

Measuring Individual Risk Attitudes When Preferences are Imprecise

There is widespread interest in measuring risk attitudes and incorporating such measures into broader econometric analyses. We consider three elicitation procedures currently in use. We find considerable variability within – and even more, between – the results they produce. We suggest that this reflects the way that different instruments interact with imprecise underlying preferences. The short run implication is that such procedures need to be used with caution and are likely to be highly context-specific. The longer run implication is that adding ‘white noise’ to deterministic models is inadequate: we need to develop models that allow for imprecision and procedural variation.

Loss Aversion? Not With Half-a-Million on the Table!

In the television show Affari Tuoi a contestant is endowed with a sealed box containing a monetary prize between one cent and half a million euros. In the course of the show the contestant is offered to exchange her box for another sealed box with the same distribution of possible monetary prizes inside. This offers a unique natural laboratory for testing the predictions of expected utility theory versus prospect theory using lotteries with large stakes. While expected utility theory predicts that an individual is exactly indifferent between accepting and rejecting the exchange offer, prospect theory predicts that an individual should always reject the exchange offer due to the assumption of loss aversion. We find that the assumption of loss aversion is violated by 46 percent of all contestants in our recorded sample. Thus, contestants do not appear to be predominantly loss averse when dealing with lotteries involving large stakes.

Testing the Predictions of Decision Theories in a Natural Experiment when Half a Million is at Stake

In the television show Affari Tuoi an individual faces a sequence of binary choices between a risky lottery with equiprobable prizes of up to half a million euros and a monetary amount for certain. The decisions of 114 show participants are used to test the predictions of ten decision theories: risk neutrality, expected utility theory, fanning-out hypothesis (weighted utility theory, transitive skew-symmetric bilinear utility theory), (cumulative) prospect theory, regret theory, rank-dependent expected utility theory, Yaarii?½s dual model, prospective reference theory and disappointment aversion theory. Assumptions of risk neutrality and loss aversion are clearly violated, respectively, by 55% and 46% of all contestants. There appears to be no evidence of nonlinear probability weighting or disappointment aversion. Observed decisions are generally consistent with the assumption of regret aversion and there is strong evidence for the fanning-out hypothesis. Nevertheless, we find no behavioral patterns that cannot be reconciled within the expected utility framework (or prospective reference theory that gives identical predictions).

Endowment effects? "Even" with half a million on the table!

In the television show Deal or No Deal, a contestant is endowed with a sealed box containing a monetary prize between one cent and half a million euros. In the course of the show, the contestant is offered to exchange her box for another sealed box with the same distribution of possible monetary prizes inside. This offers a unique natural experiment for studying endowment effects under high monetary incentives. We find evidence of only a weak endowment effect when contestants exchange their box for another box with the same distribution of possible prizes.

Myopic Loss Aversion Revisited: the Effect of Probability Distortions in Choice Under Risk

When the performance of a risky asset is frequently assessed, the probability of detecting a loss is high, which averts the loss averse investors. This effect is known as myopic loss aversion (MLA). This paper reexamines several recent experimental studies documenting the existence of MLA. A closer look at the experimental data reveals that the effect of MLA is largely neutralized by the overweighting of small probabilities and the underweighting of moderate and high probabilities. Remarkably, the two effects exactly balance each other out for conventional parameterizations of cumulative prospect theory. MLA alone cannot explain the observed investment decisions.

Leadership by Example and by Pre-Game Communication in Social Dilemma Situations

This paper compares the effects of two leadership styles: leading by pre-game communication and leading by example using an iterated voluntary contribution game. We find that pre-game communication increases the level of individual contributions in the game and has essentially the same impact on the level of individual contributions as leading by example. Yet, followers appear to be more motivated towards achieving a socially optimal outcome in leading by example than in leading by pre-game communication. We also find that the content of pre-game communication has a higher impact on individual decisions than the ex post contribution of the leader. However, false messages cause an erosion of trust: participants decrease their contributions if they have received a false message from the leader in the previous period even though leaders are re-assigned in every period.

Learning the Type of the Opponent in Imperfectly Discriminating Contests with Asymmetric Information

In a competitive environment players often face uncertainty about the relative strength of their opponents. This paper considers a winner-take-all rent-seeking contest between two players with different costs of effort. Costs of effort are private knowledge, however, players have an opportunity to learn the opponents type by engaging in either private (the opponent does not know about the information acquisition) or public (the opponent knows about the information acquisition) learning. We show that a situation, when one player learns the type of the opponent privately while the opponent abstains from learning cannot be an equilibrium. Yet, there exists an equilibrium, when one player engages in public learning and the other refrains from learning.

Auctions versus Bilateral Bargaining: Evidence from a Natural Experiment

This paper uses data from a natural experiment to compare two institutions: a simple English auction and bilateral bargaining. It appears that bilateral bargaining may be more profitable for the seller. Results also suggest no correlation between bargaining skills and an ability to make profit at the auction.

Global Network Centrality of University Rankings

Universities and higher education institutions form an integral part of the national infrastructure and prestige. As academic research benefits increasingly from international exchange and cooperation, many universities have increased investment in improving and enabling their global connectivity. Yet, the relationship of university performance and its global physical connectedness has not been explored in detail. We conduct, to our knowledge, the first large-scale data-driven analysis into whether there is a correlation between university relative ranking performance and its global connectivity via the air transport network. The results show that local access to global hubs (as measured by air transport network betweenness) strongly and positively correlates with the ranking growth (statistical significance in different models ranges between 5% and 1% level). We also found that the local airport’s aggregate flight paths (degree) and capacity (weighted degree) has no effect on university ranking, further showing that global connectivity distance is more important than the capacity of flight connections. We also examined the effect of local city economic development as a confounding variable and no effect was observed suggesting that access to global transportation hubs outweighs economic performance as a determinant of university ranking. The impact of this research is that we have determined the importance of the centrality of global connectivity and, hence, established initial evidence for further exploring potential connections between university ranking and regional investment policies on improving global connectivity.

Innovation, Entry into Multiple Markets and Unobserved Heterogeneity

This paper considers an experimental market entry game, where the decision problem involves several heterogeneous markets and players have an opportunity to enter several markets simultaneously. We find that groups fail to coordinate on any of the multiple pure strategy Nash equilibria by exhibiting excess entry in the majority of rounds. The likelihood of overentry depends on the market capacity and characteristics of the experimental markets. We also find that, on average, the behavior of the individual participants can be reconciled with the mixed strategy equilibrium prediction. Yet, this prediction fails to account for the differences in the individual profiles. By conducting an econometric estimation that accounts for the unobserved heterogeneity, we show that market capacity, expectations about the number of entrants, the amount of payoff from the previous period and the history of over- or underentry have significant impact on the individual action choice.