Robert Forsythe

Communication in the Battle of the Sexes Game: Some Experimental Results

We report experimental results on the role of preplay communication in a one-shot, symmetric battle of the sexes game. We conducted games in which there was no communication, and we studied the effects of three different communication structures: one-way communication with one round of messages and two-way communication with one round as well as three rounds of messages. With these messages, each player could indicate which action he planned to take. Communication significantly increased the frequency of equilibrium play. One-way communication was most effective in resolving the coordination problem. While there was more conflict with two-way communication, one round of communication helped to overcome some of the coordination problems, and three rounds of communication performed even better.

Wishes, expectations and actions: a survey on price formation in election stock markets

Abstract With error-prone and biased individual traders, can markets aggregate trader information and produce efficient outcomes? We review election stock market evidence that suggests this does happen. Individual traders appear biased and error-prone consistently, yet these markets prove quite efficient in predicting election outcomes. We also review work which documents comparable, but substantially different, phenomena in related laboratory markets. In addition, we report the results from a new laboratory session which shows how we can create particular biases that mirror those in election stock markets. Finally, we discuss how combined laboratory and field experiments can help us understand trader/market interactions.

Information aggregation in an experimental market

In this study, the authors report the results from laboratory asset markets designed to test the rational expectations hypothesis that markets aggregate and transmit the information of differentially informed traders. After documenting evidence in favor of the rational expectations model, they examine which features of their environment are necessary or sufficient to achieve an rational expectations equilibrium. The authors find that trading experience and common knowledge of dividends are jointly sufficient to achieve a rational expectations equilibrium, but that neither is a sufficient condition by itself. They also present some stylized facts about the convergence process leading to a rational expectations equilibrium. Copyright 1990 by The Econometric Society.

An Experiment on Coordination in Multi-Candidate Elections: The Importance of Polls and Election Histories

Do polls simply measure intended voter behavior or can they affect it and, thus, change election outcomes? Do candidate ballot positions or the results of previous elections affect voter behavior? We conduct several series of experimental, three-candidate elections and use the data to provide answers to these questions. In these elections, we pay subjects conditionally on election outcomes to create electorates with publicly known preferences. A majority (but less than two-thirds) of the voters are split in their preferences between two similar candidates, while a minority (but plurality) favor a third, dissimilar candidate. If all voters voted sincerely, the third candidate — a Condorcet loser — would win the elections. We find that pre-election polls significantly reduce the frequency with which the Condorcet loser wins. Further, the winning candidate is usually the majority candidate who is listed first on the poll and election ballots. The evidence also shows that a shared history enables majority voters to coordinate on one of their favored candidates in sequences of identical elections. With polls, majority-preferred candidates often alternate as election winners.

An experimental study of voting rules and polls in three-candidate elections

We report the results of elections conducted in a laboratory setting, modelled on a threecandidate example due to Borda. By paying subjects conditionally on election outcomes, we create electorates with (publicly) known preferences. We compare the results of experiments with and without non-binding pre-election polls under plurality rule, approval voting, and Borda rule. We also refer to a theory of voting “equilibria,” which makes sharp predictions concerning individual voter behavior and election outcomes. We find that Condorcet losers occasionally win regardless of the voting rule or presence of polls. Duvergers law (which asserts the predominance of two candidates) appears to hold under plurality rule, but close three-way races often arise under approval voting and Borda rule. Voters appear to poll and vote strategically. In elections, voters usually cast votes that are consistent with some strategic equilibrium. By the end of an election series, most votes are consistent with a single equilibrium, although that equilibrium varies by experimental group and voting rule.

What Makes Markets Predict Well? Evidence from the Iowa Electronic Markets

We use the data from the Iowa Electronic Markets to study factors associated with the ability of markets to predict future events. These are large-scale, real-money experimental markets with contract payoffs determined by political election outcomes. They provide data about individual trader characteristics and market micro-behavior which is not available from larger exchanges. In this study we find that market characteristics motivated by financial theory and previous experimental research account for most of the variance in predictive accuracy across sixteen markets. Three variables are particularly important: 1) the number of contract types traded, 2) pre-election market volumes and 3) differences in election eve (weighted) market bid and ask queues.

Forward induction in coordination games

Abstract This paper provides experimental evidence on the power of forward induction arguments in a 2×2 coordination game. Allowing one player the option of obtaining a certain payoff instead of playing the game coordinates play in the direction predicted by the forward induction argument. However, two-way pre-play communication is a more effective coordination device.

Alternative Institutions for Resolving Coordination Problems: Experimental Evidence on Forward Induction and Preplaycommunication

As the timely appearance of this volume suggests, the existence of coordination failures in a variety of strategic settings has begun to receive increased attention. Numerous games have been described in which players are required to coordinate their actions in order to reach a mutually advantageous equilibrium. Examples include network externalities (see e.g., Katz and Shapiro, 1985), product warranties with bilateral moral hazard (Cooper and Ross, 1985) and team production (Bryant, 1983). Recent work on macroeconomic models of imperfectly competitive economies (e.g., Heller, 1986, and Cooper and John, 1988) and search (Diamond, 1982) has also identified the possibility of aggregate coordination failures.

Chapter 80 Results from a Dozen Years of Election Futures Markets Research

Introduction and description of election futures markets The Iowa Electronic Markets are small-scale, real-money futures markets conducted by the University of Iowa College of Business. In this review we focus on the best known of these markets, The Iowa Political Markets. Contracts in these markets are designed so that prices should predict election outcomes. The data set contains the results of 49 markets covering 41 elections in 13 countries. The Iowa Markets operate 24-hours a day, using a continuous, double-auction trading mechanism. Traders invest their own funds, make their own trades, and conduct their own information search. The markets occupy a niche between the stylized, tightly controlled markets conducted in the laboratory and the information-rich environments of naturally occurring markets. By virtue of this design, the Iowa Markets provide data to researchers that is not otherwise available.

A Laboratory Investigation Of The Moral Hazard Problem In An Agency Relationship

Recent developments in agency theory have focused on the moral hazard problem in single-period and multiperiod models. In particular, the literature has emphasized how alternative institutions (e.g., liability rules and long-term contracts) can mitigate the adverse effects of the moral hazard problem. In this study, we use laboratory markets to examine the ability of two such institutions to remedy the adverse effects of moral hazard. We begin by presenting one set of markets with no liability rule from DeJong, Forsythe, and Lundholm [1985], hereafter DFL, where the effects of moral hazard were examined in a market for a service with a hidden characteristic; that is, the principal could not distinguish between shirking and chance as causes of an unfavorable outcome.1 The study showed that moral hazard led to shirking, and while