Syngjoo Choi

Estimating ambiguity aversion in a portfolio choice experiment

We report a laboratory experiment that enables us to estimate parametric models of ambiguity aversion at the level of the individual subject. We use two main specifications, a “kinked” specification that nests Maxmin Expected Utility, Choquet Expected Utility, α-Maxmin Expected Utility, and Contraction Expected Utility and a “smooth” specification that nests the various theories referred to collectively as Recursive Expected Utility. Our subjects solved a series of portfolio-choice problems. The assets are Arrow securities corresponding to three states of nature, where the probability of one state is known and the remaining two are ambiguous. The sample exhibits considerable heterogeneity in preferences, as captured by parameter estimates. Nonetheless, there exists a strong tendency to equalize the demands for the securities that pay off in the ambiguous states, a feature more easily accommodated by the kinked specification than by the smooth specification. We also find that a large number of subjects are well described by the ambiguity-neutral Subjective Expected Utility model.

Behavioral Aspects of Learning in Social Networks: An Experimental Study ∗

Networks are natural tools for understanding social and economic phenomena. For example, all markets are characterized by agents connected by complex, multilateral information networks, and the network structure influences economic outcomes. In an earlier study, we undertook an experimental investigation of learning in various three-person networks, each of which gives rise to its own learning patterns. In the laboratory, learning in networks is challenging and the difficulty of solving the decision problem is sometimes massive even in the case of three persons. We found that the theory can account surprisingly well for the behavior observed in the laboratory. The aim of the present paper is to investigate important and interesting questions about individual and group behavior, including comparisons across networks and information treatments. We find that in order to explain subjects’ behavior, it is necessary to take into account the details of the network architecture as well as the information structure. We also identify some “black spots” where the theory does least well in interpreting the data. Journal of Economic Literature Classification Numbers: D82, D83, C92.

Sequential equilibrium in monotone games: A theory-based analysis of experimental data

A monotone game is an extensive-form game with complete information, simultaneous moves and an irreversibility structure on strategies. It captures a variety of situations in which players make partial commitments and allows us to characterize conditions under which equilibria result in socially desirable outcomes. However, since the game has many equilibrium outcomes, the theory lacks predictive power. To produce stronger predictions, one can restrict attention to the set of sequential equilibria, or Markov equilibria, or symmetric equilibria, or pure-strategy equilibria. This paper explores the relationship between equilibrium behavior in a class of monotone games, namely voluntary contribution games, and the behavior of human subjects in an experimental setting. Several key features of the symmetric Markov perfect equilibrium (SMPE) are consistent with the data. To judge how well the SMPE fits the data, we estimate a model of Quantal Response Equilibrium (QRE) [R. McKelvey, T. Palfrey, Quantal response equilibria for normal form games, Games Econ. Behav. 10 (1995) 6-38; R. McKelvey, T. Palfrey, Quantal response equilibria for extensive form games, Exp. Econ. 1 (1998) 9-41] and find that the decision rules of the QRE model are qualitatively very similar to the empirical choice probabilities.

Network Architecture, Salience and Coordination

This paper reports the results of an experimental investigation of dynamic games in networks. In each period, the subjects simultaneously choose whether or not to make an irreversible contribution to the provision of an indivisible public good. Subjects observe the past actions of other subjects if and only if they are connected by the network. Networks may be incomplete so subjects are asymmetrically informed about the actions of other subjects in the same network, which is typically an obstacle to the attainment of an efficient outcome. For all networks, the game has a large set of (possibly inefficient) equilibrium outcomes. Nonetheless, the network architecture makes certain strategies salient and this in turn facilitates coordination on efficient outcomes. In particular, asymmetries in the network architecture encourage two salient behaviors, strategic delay and strategic commitment. By contrast, we find that symmetries in the network architecture can lead to mis-coordination and inefficient outcomes.

An Experimental Study of Sponsored-Search Auctions

We study the Generalized Second Price auctions – a standard method for allocating online search advertising – experimentally, considering both the static environment assumed by the prevailing theory and a dynamic game capturing the salient aspects of real-world search advertising auctions. We find that subjects tend to overbid in both treatments relative to the Vickrey-Clarke-Groves outcome suggested as most plausible by the theory, but that their behavior in the dynamic game resembles the behavior in the static game. Our analysis thus lends support to the use of a static game as modeling proxy, but calls into question the prevailing equilibrium predictions.

An experimental study of sponsored-search auctions

We study the Generalized Second Price auctions—a standard method for allocating online search advertising—experimentally, considering both the static environment assumed by the prevailing theory and a dynamic game capturing the salient aspects of real-world search advertising auctions. Subjects of our experiment bid consistently with the leading equilibrium notions, but exhibit significant overbidding relative to the Vickrey–Clarke–Groves (VCG) outcome favored as an equilibrium selection in the literature. The observed bidding behavior is well explained by a model that explicitly accounts for the strategic uncertainty facing a bidder, which suggests strategic uncertainty as a source of the observed departure from the VCG outcome. Meanwhile, the observed bidding behavior in static environment approximates those of dynamic environments for important cases. Our finding thus provides some empirical support for the use of a static game as a valid modeling proxy, but calls into question the prevailing equilibrium selection.

Financial Contagion in Networks: A Market Experiment

We investigate how the network structure of ?nancial linkages and uncer- tainty about the location of a shock a?ect the likelihood of contagion and the formation of prices in a double auction market experiment. Core-periphery networks are highly susceptible to contagion and generate ?re sales of assets that exacerbate ?nancial contagion beyond the mechanical role of network structure. In contrast, contagion is minimal on circle networks and market prices remain stable. Uncertainty on the location of the shock has little in?uence. The tradersi¯ comprehension level of the network-driven risk is predictive of their behavior and the likelihood of bankruptcy.

The role of education interventions in improving economic rationality

Educating for economic rationality The hypothesis that education enhances economic decision-making has been surprisingly underexplored. Kim et al. studied this question using a randomized control trial in a sample of 2812 girls in secondary schools in Malawi. Four years after providing financial support for a years schooling, they presented the subjects with a set of decision problems (for example, allocating funds to immediate versus future expenses) that test economic rationality. The education intervention enhanced both educational outcomes and economic rationality as measured by consistency with utility maximization in the long run. Science, this issue p. 83 An experiment with secondary school students shows that education enhances economic rationality measured with decision problems. Schooling rewards people with labor market returns and nonpecuniary benefits in other realms of life. However, there is no experimental evidence showing that education interventions improve individual economic rationality. We examine this hypothesis by studying a randomized 1-year financial support program for education in Malawi that reduced absence and dropout rates and increased scores on a qualification exam of female secondary school students. We measure economic rationality 4 years after the intervention by using lab-in-the-field experiments to create scores of consistency with utility maximization that are derived from revealed preference theory. We find that students assigned to the intervention had higher scores of rationality. The results remain robust after controlling for changes in cognitive and noncognitive skills. Our results suggest that education enhances the quality of economic decision-making.

Economic System and Financial Literacy: Evidence from North Korean Refugees

ABSTRACT We compare the financial literacy of two groups of Koreans living in South Korea, namely, native-born South Koreans and North Korean refugees, who were born and raised in contrasting economic systems. Examining the financial literacy of North Korean refugees and its changes over time after their settlement in a capitalistic society underscores the importance of institutional environments in developing financial literacy. We find that North Korean refugees, with very limited access to financial markets in their home country, are significantly less financially literate than native-born South Koreans. The gap is significant even after controlling for cognitive ability, which is also starkly different between the two groups. The financial literacy of the refugees increases over time during their settlement in South Korea, but the magnitude of such improvement is insubstantial. Our findings suggest that financial literacy is developed at the early life stages and cannot be easily modified at the later stages.