PUBLISHED AND FORTHCOMING PAPERS
Abstract. In this paper, we extend the standard model of social learning in two ways. First, we introduce a social network and assume that agents can only observe the actions of agents to whom they are connected by this network. Secondly, we allow agents to choose a different action at each date. If the network satisfies a connectedness assumption, the initial diversity resulting from diverse private information is eventually replaced by uniformity of actions, though not necessarily of beliefs, in finite time with probability one. We look at particular networks to illustrate the impact of network architecture on speed of convergence and the optimality of absorbing states. Convergence is remarkably rapid, so that asymptotic results are a good approximation even in the medium run.
- Observational Learning Under Imperfect Information, with Boğaçhan Çelen, Columbia B-School. Games and Economic Behavior, March 2004, 47(1), pp. 72-86.
Abstract. This paper explores Bayes-rational sequential decision making in a game with pure information externalities, where each decision maker observes only her predecessor's binary action. Under perfect information, the martingale property of the stochastic learning process is used to establish convergence of beliefs and actions. Under imperfect information, in contrast, beliefs and actions cycle forever. However, despite the instability, over time the private information is ignored and decision makers become increasingly likely to imitate their predecessors. Consequently, we observe longer and longer periods of uniform behavior, punctuated by increasingly rare switches. These results suggest that the kind of episodic instability that is characteristic of social behavior in the real world makes more sense in the imperfect-information model, and that the imperfect information premise provides a better theoretical description of fads and fashions.
- Distinguishing Informational Cascades from Herd Behavior in the Laboratory, with Boğaçhan Çelen, Columbia B-School. American Economic Review, June 2004, 94(3), pp. 484-497.
Abstract. This paper reports an experimental test of how individuals learn from the behavior of others. By using techniques only available in the laboratory, we elicit subjects' beliefs. This allows us to distinguish informational cascades (convergence of beliefs) from herd behavior (convergence of actions). By adding a setup with continuous signal and discrete action, we enrich the ball-and-urn observational learning experiments paradigm of Anderson and Holt (1997). We test a model that explains subjects' behavior as a form of generalized Bayesian behavior that incorporates limits on the rationality of others. We find strong evidence that, in Bayesian terms, subjects put too much weight on their own information and too little weight on the public information. Put differently, subjects are overconfident in the precision of their private information. To put the observed behavior into perspective, we use a simple modification of the Bayesian model, which provides a framework that enables us to understand individual behavior in the laboratory.
- An Experimental Test of Observational Learning under Imperfect Information, with Boğaçhan Çelen, Columbia B-School. Economic Theory, October 2005, 26(3), pp. 677-699 (NYU C.E.S.S. working paper).
Abstract. To explore the
difference between social learning under perfect and imperfect information,
this paper takes an experimental look at a situation in which individuals learn
by observing the behavior of their immediate predecessors. Our experimental
design is based on the theory of Çelen and Kariv (Observational Learning
Under Imperfect Information) and uses the procedures
of Çelen and Kariv (Distinguishing Informational Cascades from herd
Behavior in the Laboratory) with the exception that the history of actions
observed by subjects is different. We find is that imitation is much less
frequent when subjects have imperfect information, even less frequent than the
theory predicts. Further, while we find strong evidence that under perfect
information a form of generalized Bayesian behavior adequately explains
behavior in the laboratory, under imperfect information behavior is not even
consistent with this generalization of Bayesian behavior. To reconcile this
with the conclusions under perfect information, we undertake a modification of
the model that abandons the assumption of common knowledge of rationality.
- Behavioral Aspects of Learning in Social Networks: An Experimental Study, with Syngjoo Choi, NYU, and Douglas Gale, NYU. Advances in Applied Microeconomics, Volume 13, Behavioral and Experimental Economics, 2005, edited by John Morgan.
Abstract. 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.
Abstract. Apart from centralized exchanges such as the NYSE, most financial transactions take place in networks where one or more intermediaries link the initial seller and final buyer. This paper presents a model of financial networks, in which financial exchange is intermediated by traders who form a chain of links between the initial owner of the assets and ultimate owner of the assets. Networks are incomplete in the sense that each trader can only exchange assets with a limited number of other traders. The greater the incompleteness of the network, the more intermediation is required to transfer the assets between initial and final owners. Intermediation takes time and time is costly, so incompleteness constitutes a potentially important market imperfection. The cost and uncertainty of trade in networks may give rise to other problems and, in extreme cases, lead to a market breakdown. The results are applicable not just to financial networks but to any model of exchange which shares the same basic network structure.
- Revealing Preferences Graphically: An Old Method Gets a New Tool Kit, with Syngjoo Choi, UCL, Ray Fisman, Columbia B-School, and Douglas Gale, NYU. American Economic Review, Papers & Proceedings, May 2007, 97(2), pp.153-158.
Abstract. This paper describes the necessary tools, both methodological and analytical, for providing a comprehensive individual-level analysis of decision-making under risk. Two distinctive features of the paper are the new experimental technique, and the application of the tools of the theory of consumer demand to individual decision-making in the laboratory. To characterize an individual's decision-making under risk, it is necessary to generate many observations per subject over a wide range of choice sets. An innovative graphical interface was developed for this purpose, where subjects see on a computer screen a geometrical representation of a portfolio choice problem. Subjects choose portfolios through a simple point-and-click. This intuitive and user-friendly interface allows for the quick and efficient elicitation of many decisions per subject under a wide range of choice scenarios. The experimental platform and analytical techniques that have been developed can also be applied to many types of individual choice problems.
- Individual Preferences for Giving, with Ray Fisman, Columbia B-School, and Daniel Markovits, Yale Law School. American Economic Review, May 2007, 97(5), pp. 1858-1876. (Previously distributed in three different papers titled Individual Preferences for Giving, Pareto Damaging Behaviors and Distinguishing Social Preferences from Preferences for Altruism.) [Appendix I][Appendix II][Appendix III][Appendix IV][Appendix V][Appendix VI]
Abstract. We utilize graphical representations of Dictator Games which generate rich individual-level data. Our baseline experiment employs budget sets over feasible payoff-pairs. We test these data for consistency with utility maximization, and we recover the underlying preferences for giving (tradeoffs between own payoffs and the payoffs of others). Two further experiments augment the analysis. An extensive elaboration employs three-person budget sets to distinguish preferences for giving from social preferences (tradeoffs between the payoffs of others). And an intensive elaboration employs step-shaped sets to distinguish between behaviors that are compatible with well-behaved preferences and those that are compatible only with not well-behaved cases.
- Consistency and Heterogeneity of Individual Behavior under Uncertainty, with Syngjoo Choi, UCL, Douglas Gale, NYU, and Ray Fisman, Columbia B-School). American Economic Review, December 2007, 97(5), pp. 1921-1938. (Some of the results reported here are also distributed in Substantive and Procedural Rationality in Decisions under Uncertainty.) [Appendix I] [Appendix II] [Appendix III] [Appendix IV] [Appendix V] [Appendix VI] [Appendix VII] [Appendix VIII]
Abstract. By using graphical representations of simple portfolio choice problems, we generate a very rich data set to study behavior under uncertainty at the level of the individual subject. We test the data for consistency with the maximization hypothesis, and we estimate preferences using a two-parameter utility function based on Faruk Gul (1991). This specification provides a good interpretation of the data at the individual level and can account for the highly heterogeneous behaviors observed in the laboratory. The parameter estimates jointly describe attitudes toward risk and allow us to characterize the distribution of risk preferences in the population.
- Sequential Equilibrium in Monotone Games: Theory-Based Analysis of Experimental Data, with Syngjoo Choi, UCL, and Douglas Gale, NYU. Journal of Economic Theory, December 2008, 143(1), pp. 302–330. [Appendix]
Abstract. 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) (McKelvey and Palfrey 1995, 1998) and find that the decision rules of the QRE model are qualitatively very similar to the empirical choice probabilities.
- Trading in Networks: A Normal Form Game Experiment, with Douglas Gale, NYU. Version: September 30, 2008. Forthcoming, American Economic Journal: Microeconomics, August 2009, 1(2), pp. 114-132. [Appendix I] [Appendix II]
Abstract. This paper reports an experimental study of trading networks. Networks are incomplete in the sense that each trader can only exchange assets with a limited number of other traders. The greater the incompleteness of the network, the more intermediation is required to transfer the assets between initial and final owners. The uncertainty of trade in networks constitutes a potentially important market friction. Nevertheless, we find that the pricing behavior observed in the laboratory converges to competitive equilibrium behavior in a variety of treatments. However, the rate of convergence varies depending on the network, pricing rule, and payoff function.
- An Experimental Test of Advice and Social Learning, with Boğaçhan Çelen, Columbia B-School, and Andrew Schotter, NYU. Version: June 17, 2010. Management Science, October 2010, 56(10), pp. 1678-1701. [Appendix I]
Abstract. Social learning describes any situation in which individuals learn by observing the behavior of others. In the real world, however, individuals learn not just by observing the actions of others, but also learn from advice. This paper introduces advice giving into the standard social-learning experiment of Çelen and Kariv (2005). The experiments are designed so that both pieces of information – action and advice - are equally informative (in fact, identical) in equilibrium. Despite the informational equivalence of advice and actions, we find that subjects in a laboratory social-learning situation appear to be more willing to follow the advice given to them by their predecessor than to copy their action, and that the presence of advice increases subjects' welfare.
- Network Architecture, Salience and Coordination, with Syngjoo Choi, UCL, Douglas Gale, NYU, and Thomas Palfrey, Caltech. Version: January 5, 2011. Games and Economic Behavior, September 2011, 73(1), pp. 76-90. [Appendix I] [Appendix II] [Appendix III]
Abstract. 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.
- Network Architecture and Mutual Monitoring in Public Goods Experiments, with Jeffrey Carpenter, Middlebury College, and Andrew Schotter, NYU. Review of Economic Design, September 2012, 16(2-3), pp. 175-191. [Appendix I]
Abstract. Following Fehr and Gäechter (2000), a large and growing number of experiments show that public goods can be provided at high levels when mutual monitoring and costly punishment are allowed. Nearly all experiments, however, study monitoring and punishment in a complete network where all subjects can monitor and punish each other. The architecture of social networks becomes important when subjects can only monitor and punish the other subjects to whom they are connected by the network. We study several incomplete networks and find that they give rise to their own distinctive patterns of behavior. Nevertheless, a number of simple, yet fundamental, properties in graph theory allow us to interpret the variation in the patterns of behavior that arise in the laboratory and to explain the impact of network architecture on the efficiency and dynamics of the experimental outcomes.
- Social Learning in Networks: A Quantal Response Equilibrium Analysis of Experimental Data, with Syngjoo Choi, UCL, and Douglas Gale, NYU. Review of Economic Design, September 2012, 16(2-3), pp. 93-118. [Appendix I] [Appendix II]
Abstract. Individuals living in society are bound together by a social network and, in many social and economic situations, individuals learn by observing the behavior of others in their local environment. This process is called social learning. Learning in incomplete networks, where different individuals have different information, is especially challenging: because of the lack of common knowledge individuals must draw inferences about the actions others have observed, as well as about their private information. This paper reports an experimental investigation of learning in three-person networks and uses the theoretical framework of Gale and Kariv (2003) to interpret the data generated by the experiments. The family of three-person networks includes several non-trivial architectures, each of which gives rise to its own distinctive learning patterns. To test the usefulness of the theory in interpreting the data, we adapt the Quantal Response Equilibrium (QRE) model of McKelvey and Palfrey (1995, 1998). We find that the theory can account for the behavior observed in the laboratory in a variety of networks and informational settings. This provides important support for the use of QRE to interpret experimental data.
- An Old Measurement of Decision-making Quality Sheds New Light on Paternalism, with Dan Silverman, Arizona State University. Journal of Institutional and Theoretical Economics, February 2013, 169(1), pp. 29-44.
Abstract. Definitive judgment about the quality of decision making is made difficult by twin problems of measurement and identification. A measure of decision-making quality is hard to formalize, to quantify, and to make practical for use in a variety of choice environments; and it is difficult to distinguish differences in decision-making quality from unobserved differences in preferences, information, beliefs, or constraints. In this paper, we describe a widely applicable set of tools for theoretical analysis and experimental methods for addressing these problems. These tools and methods can indicate a more targeted approach to “light paternalism” polices aimed at improving decision-making quality.
- Who is (More) Rational? with Syngjoo Choi, UCL, Wieland Müller, Tilburg University, and Dan Silverman, Arizona State University. Version: April 11, 2013. Revise and resubmitted American Economic Review. [Appendix I] [Appendix II] [Appendix III] [Appendix IV] [Appendix V]
Abstract. Revealed preference theory offers a criterion for decision-making quality: if decisions are high quality then there exists a utility function the choices maximize. We conduct a large-scale experiment to test for consistency with utility maximization. Consistency scores vary markedly within and across socioeconomic groups. In particular, consistency is strongly related to wealth: a standard deviation increase in consistency is associated with 15-19 percent more household wealth. This association is quantitatively robust to conditioning on correlates of unobserved constraints, preferences, and beliefs. Consistency with utility maximization under laboratory conditions thus captures decision-making ability that applies across domains and influences important real-world outcomes.
Abstract. Campaigns for the Presidency often place a great deal of emphasis on the "character" of the candidates, but why? Why should voters care whether a candidate has an illicit affair or smokes in secret or invests speculatively or exaggerates athletic accomplishments? Moral issues aside, such behavior would seem to matter only if it provided a guide to policymaking decisions. But it might, because such behavior is risky and a candidate's (past and present) attitude toward risk in the private domain may provide clues about – or even pin down completely – the candidate's attitude toward risk in the public domain, if there is a sufficiently strong linkage between these attitudes. This paper formalizes this issue, identifies a linkage, and provides a necessary and sufficient condition that the linkage be strong enough. This condition requires that voters observe a large – perhaps impossibly large – amount of information about the candidate's choices/preferences.
- How Did the Great Recession Impact Social Preferences? with Ray Fisman, Columbia B-School, and Pam Jakiela, University of Maryland. Version: January 12, 2013. [Appendix I] [Appendix II] [Appendix III]
Abstract. We compare behavior in modified dictators game during the “Great Recession” to behavior in otherwise identical experiments conducted amidst the economic boom that preceded it. The experiments capture both differences in indexical selfishness and differences in equality-efficiency tradeoffs. Subjects exposed to the recession exhibit higher levels of indexical selfishness and greater emphasis on efficiency relative to equality. Reproducing recessionary conditions inside the laboratory by confronting subjects with negative payoffs relative to initial endowments intensifies selfishness and increases the willingness to trade equality for efficiency, though the impact is modest relative to that of the real-world economic downturn.
- Estimating Ambiguity Aversion in a Portfolio Choice Experiment, with David Ahn, Berkeley, Syngjoo Choi, UCL, and Douglas Gale, NYU. Version: March 10, 2011. Revise and resubmit, Quantitative Economics. [Appendix I] [Appendix II] [Appendix III] [Appendix IV] [Appendix V] [Appendix VI] [Appendix VII] [Appendix VIII] [Appendix IX] [Appendix X]
Abstract. We report a laboratory experiment that enables us to estimate parametric models of ambiguity aversion in 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. There is a variety of theoretical models of attitudes toward risk and ambiguity, but they all give rise to one of two main specifications. These specifications are characterized by two parameters: one is the familiar coefficient of risk aversion and the other is a measure of ambiguity aversion. We also estimate a three-parameter specification that allows for loss/disappointment aversion as well as ambiguity aversion. The parameter estimates for individual subjects exhibit considerable heterogeneity. Nevertheless, tests of significance suggest that the majority of subjects are well described by the Subjective Expected Utility model. The remainder have a statistically significant degree of ambiguity and/or loss aversion.
- Exposure to Ideology and Distributional Preferences, with Ray Fisman, Columbia B-School, and Daniel Markovits, Yale Law School. Version: July 19, 2009 (under revision). [Appendix I] [Appendix II] [Appendix III]
Abstract. We study the impact of exposure to ideology on distributional preferences in the context of modified Dictator Games that vary the price of giving. We exploiting a natural experiment in education -- random assignment to first-term instructors at the Yale Law School -- in order to distinguish the self-selection into a discipline from the learning that education in this discipline provides. We find that subjects exposed to instructors that stress traditional economic ideas display a greater emphasis on efficiency (increasing total payoffs) relative to those exposed to instructors that stress ideas from the humanities, who emphasize equity (reducing differences in payoffs). Subjects exposed to economics instructors also display greater levels of indexical selfishness (greater weight on own payoff) relative to those exposed to humanist instructors.
Abstract. Theories of justice in the spirit of Harsanyi and Rawls argue that fair-minded people should aspire to make choices for society -- that is, for themselves and for others -- as if in the original position, behind a veil of ignorance that prevents them from knowing their own social and economic positions in society. While the original position is a purely hypothetical situation, developed as a thought experiment, the main result of this paper is that (under certain assumptions) preferences -- hence choices -- behind the veil of ignorance are determined by preferences in front of the veil of ignorance. This linkage between preferences behind and in front of the veil of ignorance has implications for distributive theories of justice and for theories of choice.
- Substantive and Procedural Rationality in Decisions under Uncertainty, with Syngjoo Choi, UCL, Douglas Gale, NYU, and Ray Fisman, Columbia B-School. Version: March 31, 2006 (under revision).
Abstract. We report a laboratory experiment that enables us to study systematically the substantive and procedural rationality of decision making under uncertainty. By using novel graphical representations of budget sets over bundles of state-contingent commodities, we generate a very rich data set well-suited to studying behavior at the level of the individual subject. We test the data for consistency with the maximization hypothesis, and we recover underlying preferences using both nonparametric and parametric methods. We find considerable heterogeneity in individual behaviors across subjects. In spite of this heterogeneity, we identify prototypical heuristics that inform subjects' decision rules. To account for these heuristics, we propose a type-mixture model based on Expected Utility Theory employing only combinations of three heuristics which correspond to the behavior of individuals who are infinitely risk averse, risk neutral, and expected utility maximizers with intermediate risk aversion. This links the procedural rationality that is evident in the data to substantive rationality, and supports the use of Expected Utility Theory for both normative and descriptive purposes.
- Overconfidence and Informational Cascades. Version: March 21, 2005 (under revision).
Abstract. This paper combines behavioral economics and social learning. We test how robust the theory is to the well-known behavioral phenomenon of individual overconfidence (mistaken private information perception, specifically overvaluing). In the context of social learning, overconfident agents overweigh their private information relative to the public information revealed by the decisions of others. Therefore, when following a herd, they broadest more of the information available to them. However, overconfidence trades the additional information revealed by overconfident decisions against more information that is being suppressed by perfectly rational decisions. Thus, the presence of overconfident individuals intensifies the free-rider problem of rational individuals. With the help of numerical simulations, we show that, from a social perspective, the presence of overconfident agents cannot improve decisions accuracy or break the poor information flow intrinsic to erroneous uniform behavior.