Joshua Tasoff

An Economic Framework of Microbial Trade

A large fraction of microbial life on earth exists in complex communities where metabolic exchange is vital. Microbes trade essential resources to promote their own growth in an analogous way to countries that exchange goods in modern economic markets. Inspired by these similarities, we developed a framework based on general equilibrium theory (GET) from economics to predict the population dynamics of trading microbial communities. Our biotic GET (BGET) model provides an a priori theory of the growth benefits of microbial trade, yielding several novel insights relevant to understanding microbial ecology and engineering synthetic communities. We find that the economic concept of comparative advantage is a necessary condition for mutualistic trade. Our model suggests that microbial communities can grow faster when species are unable to produce essential resources that are obtained through trade, thereby promoting metabolic specialization and increased intercellular exchange. Furthermore, we find that species engaged in trade exhibit a fundamental tradeoff between growth rate and relative population abundance, and that different environments that put greater pressure on group selection versus individual selection will promote varying strategies along this growth-abundance spectrum. We experimentally tested this tradeoff using a synthetic consortium of Escherichia coli cells and found the results match the predictions of the model. This framework provides a foundation to study natural and engineered microbial communities through a new lens based on economic theories developed over the past century.

Everyone Believes in Redemption: Nudges and Overoptimism in Costly Task Completion

We conduct a laboratory experiment which elicits subjects’ beliefs about the likelihood that they will redeem a mail-in form. By comparing subjects’ expected redemption rates to actual redemption rates we find that subjects are overoptimistic about their likelihood of redemption and thus “leave money on the table.” Moreover, we find that overoptimism is increasing with the belief in redemption, suggesting that the consumers who are most likely to select an option requiring future action make the largest errors. We then test the impact of three “nudges” on overoptimism: (1) informing subjects about a previous cohort’s redemption rates, (2) reminding subjects about the redemption deadline, and (3) reducing transaction costs. Testing the interventions helps to both uncover the mechanisms of overoptimism and provides preliminary evidence for potential policy. The third nudge was the only treatment that had any detectable e ect, and it reduced overoptimism by approximately one half. It reduced overoptimism by increasing redemption rates but not by decreasing people’s mean belief. We find that redemption is sensitive to the payo and cost of redemption but beliefs are almost constant. This suggests that weak cost-salience is the mechanism for overoptimism. úThe views expressed in this paper are those of the authors and not necessarily those of the Federal Trade Commission or any individual commissioner. Letzler did not use FTC time or resources to help implement and run the experiment, analyze the data, or write up the results. We would like to thank: Peter Fishman, Matthew Rabin, Dan Acland, Botond K szegi, Colin Camerer, Stephanie Wang, Matthew R. Levy, Eric Helland, seminar participants at Berkeley’s Psychology and Economics Non-Lunch, Colin Camerer’s lab meeting, WEAI San Diego 2011, ESA International Conference Chicago 2011, ESA Tuscon Conference 2011, the UC Berkeley Goldman School of Public Policy, Claremont Graduate University Behavioral Economics and Institutions Seminar, the UC Riverside Theory Seminar, and the Southern California Conference in Applied Microeconomics. We thank Masyita Crystallin, Jason Henshall, Peiran Jiao, and Yanyan Yang for outstanding research assistance. We thank Oliver Ortlieb for outstanding programming and website administration. Taso gratefully acknowledges the financial support of the Russell Sage Foundation through Grant No. 98-11-01. All errors are evidence of our overoptimism.We elicit subjects’ beliefs about the likelihood that they will redeem a mail-in form. Expected redemption rates exceed actual redemption rates by 49 percentage points, meaning that subjects are overoptimistic about their likelihood of redemption. We test the impact of three “nudges” on overoptimism: (1) informing subjects about a previous cohorts redemption rates, (2) reminding subjects about the redemption deadline, and (3) reducing transaction costs. The first two treatments reduced overoptimism by 7 and 8 percentage points respectively, but these effects were not significant. Only the third nudge had a significant effect and it reduced overoptimism by 26 percentage points. All three nudges increased redemption but had no statistically significant effect on beliefs. Our results suggest that weak cost-salience is an important mechanism for overoptimism.

A Model of Attention and Anticipation

We develop a model in which people experience standard consumption utility, as well as anticipatory utility defined as the weighted sum of independently anticipated consumption “episodes” or “dimensions”. The weights on these dimensions correspond to the attention that the person pays to the dimension. We assume attention on a dimension increases when expected consumption utility in the dimension differs from expected consumption utility under the default action or the prior belief. We show that the decision maker will pay more for information about dimensions with high expected consumption utility, and the willingness to pay may be negative when expected consumption utility is low. Additionally, when expected consumption utility is sufficiently low, but not when it is high, the decision maker will follow the default action even if it is suboptimal from a consumption standpoint. Furthermore, given the decision maker’s current beliefs and preferences in a dimension, he will consume more in that dimension if he just received information. We then consider an advertisement application in which a monopolist decides whether to certifiably reveal the quality of various exogenous attributes of a good to a consumer who may choose to buy or not. There exists a sequential equilibrium for which the monopolist will not disclose information for attributes in which the consumer’s utility with the highest quality good is sufficiently worse than not buying the good. Competition increases disclosure.

When Higher Productivity Hurts: The Interaction Between Overconfidence and Capital

We investigate how the increased availability of a factor of production can make an overconfident agent worse off. In our model, two effects drive this result. First, when a production factor and ability are complements in the production function, the agent may overpay for the production factor. Second, the acquisition of this factor will distort the agent’s choice of what activities to pursue. In contrast, when the factor and ability are substitutes, the agent will undervalue the factor. In a laboratory experiment we find that subjects overpay for ability-complements, and underpay for ability-substitutes. Subjects provided with free ability-complements earn less due to how it distorts the subjects’ perceptions of what activity to pursue.

Exponential-Growth Bias in Experimental Consumption Decisions

Exponential-growth bias (EGB) is the tendency to neglect the power of compounding inter- est. A person with EGB will misperceive the intertemporal budget constraint, overestimating lifetime wealth and underestimating the differences in the cost of consumption across periods . We test four comparative static predictions implied by EGB: (1) compound interest will increase consumption, (2) budget-neutral delays in income will increase consumption, (3) the person will exhibit a form of dynamic inconsistency that depends solely on the current account balance and is independent of time preferences, and (4) framing the frequency of interest in shorter units increases consumption. We test these predictions using an induced-value consumption-savings experiment in the lab, and find evidence in support of all predictions against the rational bench- mark. People may use rules of thumb when making consumption-savings decisions. We consider three rules of thumb as alternative hypotheses and find that they cannot explain the results.

Misunderestimation: Exponential-Growth Bias and Time-Varying Returns

Exponential-growth bias is the tendency to neglect the compounding of interest. The economics literature has used the fact that a biased agent in many circumstances will underestimate the value of assets that grow according to compound interest. We show that the opposite can also be true. It is always possible to make an agent who underestimates exponential growth to overestimate the value of an asset that grows exponentially. This paradoxical phenomenon arises when interest rates vary over time. This gives rise to the averaging effect of exponential-growth bias, which causes agents to perceive the mean return to exceed the true mean. Consequently, biased agents will strictly prefer assets with time-varying returns over equivalent constant-return assets. With sufficient variation in returns any biased agent will overestimate the true value of an asset for any time horizon.

Placation and provocation

It has been observed that industries self-regulate to placate a regulator from taking action, and revolutionary vanguards sometimes provoke an apathetic populace into revolt. This paper presents a very simple model that captures this strategic maneuvering, and applies it to several other examples. Two players have preferences over the realization of a policy; the first player has a marginal cost to affect the policy and the second player has a fixed cost. The fixed cost provides strategic incentives for the first mover to placate or provoke the second player. In equilibrium, the second mover may benefit from having preferences that diverge more from the first mover, and may benefit by having higher fixed costs. As the number of first movers increases, placation and provocation both become more likely, and the second player’s incentives to occlude or reveal its fixed cost become stronger as well.