Hubert Janos Kiss

Do Social Networks Prevent Bank Runs

We develop, both theoretically and experimentally, a stereotypical environment that allows for co-ordination breakdown, leading to a bank run. Three depositors are located at the nodes of a network and have to decide whether to keep their funds deposited or to withdraw. One of the depositors has immediate liquidity needs, whereas the other two depositors do not. Depositors act sequentially and observe others’ actions only if connected by the network. Theoretically, a link connecting the first two depositors to decide is sufficient to avoid a bank run. However, our experimental evidence shows that subjects’choice is not a¤ected by the existence of the link per se. Instead, being observed and the particular action that is observed determine subjects’choice. Our results highlight the importance of initial decisions in the emergence of a bank run. In particular, Bayesian analysis reveals that subjects clearly depart from predicted behavior when observing a withdrawal.

Does Payoff Equity Facilitate Coordination? A Test of Schelling's Conjecture

Starting from Schelling (1960), several game theorists have conjectured that payoff equity might facilitate coordination in normal-form games with multiple equilibria – the more equitable equilibrium might be selected either because fairness makes it focal or because many individuals dislike payoff inequities, as abundant experimental evidence suggests. In this line, we propose a selection principle called Equity (EQ), which selects the equilibrium in pure strategies minimizing the difference between the highest and smallest money payoff, if only one such equilibrium exists. Using a within-subjects experimental design, furthermore, we study the relative performance of EQ in twelve simple 2×2 coordination games. In many of these games, we find that EQ explains individual behavior better than a large range of alternative theories, including theories of bounded rationality and several other equilibrium selection principles. Yet we also observe that the frequency of EQ play depends on the payoff structure of the game. For instance, EQ play diminishes when the alternative equilibrium is socially efficient and not very unfair (compared with the EQ equilibrium). Our data suggests that equilibrium selection is affected by several factors and that subjects are heterogeneous in this respect, but also that equity is often a crucial factor to understand coordination.

Do women panic more than men? An experimental study of financial decisions

We report experimental evidence on gender differences in financial decision-making that involves three depositors choosing whether to keep their money deposited or to withdraw it. We find that ones position in the line, the fact that one is being observed and observed decisions are key determinants in explaining the subjects’ behavior. Our main result is that men and women do not react differently to what is observed. However, there are gender differences regarding the effect of being observed: women value the fact of being observed more, while men value the number of subsequent depositors who observe them. Interestingly, risk aversion has no predictive power on depositors’ behavior.

Sequential decisions in the Diamond-Dybvig banking model

We study the Diamond-Dybvig model of financial intermediation (JPE, 1983) under the assumption that depositors have information about previous decisions. Depositors decide sequentially whether to withdraw their funds or continue holding them in the bank. If depositors observe the history of all previous decisions, we show that there are no bank runs in equilibrium independently of whether the realized type vector selected by nature is of perfect or imperfect information.

Would Depositors Like to Show Others that They Do Not Withdraw? Theory and Experiment

There is an asymmetry regarding what previous decisions depositors may observe when choosing whether to withdraw or keep the money deposited: it is more likely that withdrawals are observed. We study how decision-making changes if depositors are able to make their decision to keep their funds in the bank visible to subsequent depositors at a cost. We show theoretically in a Diamond-Dybvig setup that without this signaling option multiple equilibria are possible, while signaling makes the no-run outcome the unique equilibrium. We test if the theoretical predicitions hold in a lab experiment. We find that indeed when signaling is available, bank runs are less likely to arise and signaling is extensively used.

Correlated observations, the law of small numbers and bank runs

Empirical descriptions and studies suggest that generally depositors observe a sample of previous decisions before deciding if to keep their funds deposited or to withdraw them. These observed decisions may exhibit different degrees of correlation across depositors. In our model depositors decide sequentially and are assumed to follow the law of small numbers in the sense that they believe that a bank run is underway if the number of observed withdrawals in their sample is large. Theoretically, with highly correlated samples and infinite depositors runs occur with certainty, while with random samples it needs not be the case, as for many parameter settings the likelihood of bank runs is zero. We investigate the intermediate cases and find that i) decreasing the correlation and ii) increasing the sample size reduces the likelihood of bank runs, ceteris paribus. Interestingly, the multiplicity of equilibria, a feature of the canonical Diamond-Dybvig model that we use also, disappears almost completely in our setup. Our results have relevant policy implications.

On the Optimal Design of Operational Risk Data Consortiums

To manage operational risk banks increasingly use data coming from data consortia that are formed by peer institutions. Though existing data consortia seem to work appropriately, it is worth studying what makes banks to report properly (that is, thoroughly and truthfully), since in several countries where new data consortia are planned to be set up, there are fears that banks may choose to report untruthfully or hide information (what we call misreporting). We show that if misreporting cannot be detected, then even in an infi nitely repeated setup the game has multiple equilibria, so proper reporting is not the unique outcome. Then, we study two types of sanctions. When the punishment is non-monetary (eg, exclusion from the consortium for a given number of periods), then for some parameter values even the harshest punishment cannot bring about proper reporting as the unique outcome. Nonetheless, a numerical example suggests that by designing adequately the data consortium, proper reporting can be advanced, without compromising anonymity overly. When a monetary fi ne is imposed on misreporting banks, then a sufficiently large punishment attains proper reporting, even if anonymity is maintained in the limit.

Which preferences associate with school performance?—Lessons from an exploratory study with university students

Success in life is determined to a large extent by school performance so it is important to understand the effect of the factors that influence it. In this exploratory study, in addition to cognitive abilities, we attempt to link measures of preferences with outcomes of school performance. We measured in an incentivized way risk, time, social and competitive preferences and cognitive abilities of university students to look for associations between these measures and two important academic outcome measures: exam results and GPA. We find consistently that cognitive abilities (proxied by the Cognitive Reflection Test) are very well correlated with school performance. Regarding non-cognitive skills, we report suggestive evidence for many of our measured preferences. We used two alternative measures of time preference: patience and present bias. Present bias explains exam grades better, while patience explains GPA relatively better. Both measures of time preferences have a non-linear relation to school performance. Competitiveness matters, as students, who opt for a more competitive payment scheme in our experimental task have a higher average GPA. We observe also that risk-averse students perform a little better than more risk-tolerant students. That makes sense in case of multiple choice exams, because more risk-tolerant students may want to try to pass the exam less prepared, as the possibility of passing an exam just by chance is not zero. Finally, we have also detected that cooperative preferences—the amount of money offered in a public good game—associates strongly with GPA in a non-linear way. Students who offered around half of their possible amounts had significantly higher GPAs than those, who offered none or all their money.

Do Streaks Matter in Multiple Choice Tests

Success in life is determined to a large extent by school performance, which in turn depends heavily on grades obtained in exams. In this study, we investigate a particular type of exam: multiple-choice tests. More concretely, we study if patterns of correct answers in multiple-choice tests affect performance. We design an experiment to study if students who take a multiple-choice test with streaks of identical answers earn fewer points than students taking a test with a variable pattern of answers, and we study several potential mechanisms. We do not find a clear treatment effect, as multiple-choice test points were not significantly lower in a consistent manner in the treatment groups. We observe that in a streak, the likelihood to choose a different and incorrect answer than the previous ones is higher in the treated group. The number of identical previous answers does not seem to explain these choices of incorrect answers.

Optimal Payments to Connected Depositors in Turbulent Times: A Markov Chain Approach

We propose a discrete time probabilistic model of depositor behavior which takes into account the information flow among depositors. In each time period each depositors’ current state is determined in a stochastic way, based on their previous state, the state of other connected depositors, and the strategy of the bank. The bank offers payment to impatient depositors (those who want to withdraw their funds) who accept or decline them with certain probability, depending on the offered amount. Our principal aim is to see what are the optimal offers of the bank if it wants to keep the expected chance of a bank run under a certain level and minimize its expected payments, while taking into account the connection structure of the depositors. We show that in the case of the proposed model this question results in a nonlinear optimization problem with nonlinear constraints and that the method is capable of accounting for time-varying resource limits of the bank. Optimal offers increase (a) in the degree of the depositor, (b) in the probability of being hit by a liquidity shock, and (c) in the effect of a neighboring impatient depositor.