Gary E. Bolton

Learning by Doing in the Newsvendor Problem: A Laboratory Investigation of the Role of Experience and Feedback

We investigate learning by doing in the newsvendor inventory problem. An earlier study observed that decision makers tend to anchor their orders around average demand and fail to adjust sufficiently toward the expected profit-maximizing order. Principles of behavioral theory suggest some relatively simple interventions into the decision makers experience and feedback that might improve performance, and these guide our investigation. The results imply that the institutional organization of experience and feedback may have a significant influence on whether inventory is stocked optimally.

Engineering Trust: Reciprocity in the Production of Reputation Information

Reciprocity in feedback giving distorts the production and content of reputation information in a market, hampering trust and trade efficiency. Guided by feedback patterns observed on eBay and other platforms, we run laboratory experiments to investigate how reciprocity can be managed by changes in the way feedback information flows through the system, leading to more accurate reputation information, more trust, and more efficient trade. We discuss the implications for theory building and for managing the redesign of market trust systems. This paper was accepted by Teck Ho, decision analysis.

Measuring motivations for the reciprocal responses observed in a simple dilemma game

A reciprocal action is an action meant to have a similar influence on anothers payoff as anothers action has on ones own. One hypothesis asserts that reciprocal action is triggered by the reciprocators belief that anothers action was good or ill intended. The other hypothesis says that the reciprocator is simply acting to implement fixed preferences over payoff allocations. We report on an experiment that allows us to study both positive (reward) and negative (punishment) reciprocal action in a single framework. Knowing the preferences for payoff allocations is sufficient to account for nearly all the reciprocal action we observe in our experiment.

Managers and Students as Newsvendors

We compare how experienced procurement managers and students solve the newsvendor problem. We find that managers broadly exhibit the same kind of pull-to-center bias as students do. Also, managers use information and task training no better than students. The performance of managers is positively affected by the level of their education and their level in the organizational hierarchy. We discuss implications for theory and for how ordering might be improved in practice. This paper was accepted by Teck Ho, decision analysis.

A Laboratory Study of the Benefits of Including Uncertainty Information in Weather Forecasts

Abstract Modern operational methods of numerical weather prediction, such as “ensemble forecasting,” allow assessments of state-dependent predictability to be made. This means that forecast-specific estimates of the forecast standard errors are possible. Quantitative estimates of forecast uncertainty are often not communicated to the public as it is unclear what the value of this information will be to people who must make weather-dependent decisions. Using laboratory-based methods developed by experimental economists to study individual choice it is found that nonspecialists are able to make better decisions that increase their expected reward while reducing their exposure to risk, when provided with information about the day-to-day uncertainty associated with temperature forecasts. The experimental framework used herein may provide a useful tool for evaluating the effectiveness with which weather forecasts can be communicated to end users.

Adaptive Learning versus Punishment in Ultimatum Bargaining

Adaptive learning and punishment are highly prominent competing explanations for ultimatum game behavior. We report on an experiment that considers each theory in stand-alone form, so that one does not rely on the other in any substantial way. Our data exhibits patterns for which punishment can account but learning by itself cannot. Initial play varies substantially- and systematically-across variations on the ultimatum game, and this leads to differences in later play as well. Hence a complete theory of ultimatum game behavior will have to predict initial conditions as well as describe the influence of repeated play.

Does Competition Promote Trust and Trustworthiness in Online Trading? An Experimental Study

We investigate whether greater market competition improves or inhibits the ability of feedback systems in Internet markets to deliver trust and trustworthiness to the marketplace. Our investigation is grounded in the theory of signaling from information economics. Using methods from experimental economics, we create a laboratory online market where sellers face a moral hazard. We manipulate the level of market competition and the nature of the social network behind the feedback system and study the affect on trust, trustworthiness, and market efficiency. We find that competition in strangers networks, where market encounters are one-shot and reputation information is communicated through outside parties, improves trust, trustworthiness, and market efficiency. The efficiency advantage that partners networks, where a buyer can maintain a repeated relationship with a seller, have over strangers networks largely vanishes with the introduction of competition. This is because the difference in the pattern of social networking largely disappears. Overall, encouraging competition leads to more effective feedback systems in Internet markets. We discuss implications for trader strategy and Internet market design.

How Communication Links Influence Coalition Bargaining: A Laboratory Investigation

Complexity of communication is one of the important factors that distinguishes multilateral negotiation from its bilateral cousin. We investigate how the communication configuration affects a three-person coalition negotiation. Restricting who can communicate with whom strongly influences outcomes, and not always in ways that current theory anticipates. Competitive frictions, including a tendency to communicate offers privately, appear to shape much of what we observe. Our results suggest that parties with weaker alternatives would benefit from a more constrained structure, especially if they can be the conduit of communication, while those endowed with stronger alternatives would do well to work within a more public communication structure that promotes competitive bidding.

The rationality of splitting equally

Abstract Conventional economic models seem unable to capture the propensity for 50–50 bargaining divisions observed in the lab. Experiments further suggest that something outside the usual set of economic parameters systematically influences bargaining settlements. I examine a simple bargaining model from a biological perspective. A limit evolutionarily stable strategy, FAIRMAN, makes 50–50 offers, punishes demands for more, and exploits demands for less. Fairman involves strategy perturbations resembling probes for concessions. When bargainers can use a signal to discriminate among partners, 50–50 is the unique limit evolutionarily stable outcome. The results suggest that some social conventions persist because they promote efficiency in an evolutionarily stable manner.

Bargaining and Dilemma Games: From Laboratory Data Towards Theoretical Synthesis

Bargaining and dilemma games have developed in experimental economics as fairly separate literatures. More than a few analysts are now persuaded that the patterns of behavior in these games are closely related, and considerable effort is being put into a search for models that bridge the gap between the two types of games. I focus on a handful of models that, when taken together, outline the conceptual issues, and provide a sense of the progress that has already been made.