1st CUFE-Birmingham Workshop on Experimental and Behavioural Economics and Finance

June 26, 2013, Beijing

Venue: Room 604, Academic Hall, South College Road Campus, Central University of Finance and Economics

Keynote Speakers: Nick Feltovich, Monash University; Zhu Ning, Shanghai Jiao Tong University

9:00am Welcoming and Opening Remarks

Liqing Zhang, Dean and Professor, School of Finance, CUFE

David Dickinson, Professor, Birmingham University; Visiting Professor, School of Finance, CUFE

9:15 – 10:15am Nick Feltovich, “Bargaining under Earned Bargaining Power,” (withNejat Anbarci)

10:15 – 10:45am Coffee Break

10:45–11.10am Yu Yvette Zhang "Overbidding in second price auctions: Joy of winning, bounded rationality and house money effect," (with Rudy Nayga and Dinah Depositario)

11:10–11:35am Xiao Liu “Crowdsourcing with All-Pay Auctions: A Field Experiment on Taskcn,” (with Jiang Yang, Lada A. Adamic and Yan Chen)

11:35 – 12:00pm Rajiv Sarin “An Experiment on Asymmetric Information in First-Price Common-Value Auctions: The Blessed Winner,” (with Brit Grosskopf and Lucas Rentschler)

12:00 – 1:00pm Lunch

1:15 – 1:40pm Brit Grosskopf “The Demand for Expressing Emotions,” (with Kristian Lopez)

1:40 – 2.05pm Michalis Drouvelis “The Effects of Happiness and Anger on Prosocial Behaviour” (with Brit Grosskopf)

2:05 – 2.30pm Ziqiang Xin “Homo Economicus Belief Inhibits Trust”

2:30 – 2:55pm Maoliang Ye “Does Gradualism Build Trust? Evidence from A Multi-round Experiment”

2.55 – 3:25pm Coffee Break

3:25 – 3:50pm Sophia Xiaofei Pan “Hidden Cost of Giving,” (with Erte Xiao)

3:50 ? 4.15pm Ulrik Beierholm “How hard to work: Experimentally Testing a Normative Model of Human Vigour”

4:15 –4:40pm Yuqin Huang “Local Bias in Investor Attention: Evidence from China’s Internet Stock Message Boards” (with Wu Zhiguo, Qiu Huiyan)

4:40 –5.30pm Ning Zhu “The Investors’ Greatest Enemy”

5:30 – 5:40pm Closing Remarks

6pm Conference Dinner (by invitation)

Abstracts

Bargainingunder Earned Bargaining Power,

Nick Feltovich with Nejat Anbarci

Previous research has shown that individuals do not respond to changes in their bargaining position to the extent predicted by standard bargaining theories. Most of these results have come from experiments with bargaining power allocated exogenously, so that individuals may perceive it as having been "unearned" and thus be reluctant to exploit it. Also, equal splits of the "cake" (the amount bargained over) have typically been equilibrium outcomes, leading to a powerful tendency toward 50-50 splits. We conduct a bargaining experiment in which subjects earn their bargaining power through a real-effort task. Treatments are based on the Nash demand game (NDG) and a related unstructured bargaining game (UBG). Subjects bargain over a fixed amount of money, with disagreement payments determined entirely by the number of units of the real-effort task successfully completed. Task parameters are set to allow disagreement payoffs above half the cake size, in which case 50-50 splits are not individually rational, and thus not consistent with equilibrium.

Overbiddingin second price auctions: Joy of winning, bounded rationality and house money effect

yu yvette zhang, with Rudy Nayga and Dinah Depositario

Overbidding occurs frequently in laboratory second price auctions, despite the theoretical prediction of bidding one’s true value. In this study, we conducted experimental auctions to investigate the causes of overbidding in second price auctions. We employed different payment timing schemes, including pre-payment, on the spot payment and delayed payment, to induce variations in bidders’ reference points in their decision making. This experiment design, combined with elicited bidder’s risk attitude and time discount rate, allowed us to explore how individual attributes and environmental factors influence bidding behaviors. We found that: (i) bids were significantly lower and converged to the true values in the last ten rounds compared with the first ten rounds, suggesting learning effects and bounded rationality; (ii) the probability of overbidding increased with degree of risk aversion lending supports to the “Joy of winning” hypothesis; (iii) consistent with “house money effect”, overbidding was significantly reduced when the endowment was paid two weeks after the experiment day and the subjects had to pay the experiment loss using their own money on the experiment day.

Crowdsourcingwith All-pay Auctions: a Field Experiment on Taskcn

Xiao Liu, with Jiang Yang, Lada A. Adamic and Yan Chen

To explore the effects of different incentives on crowdsourcing participation and submission quality, we conduct a field experiment on Taskcn, a large Chinese crowdsourcing site using all-pay auction mechanisms.In our study, we systematically vary the size of the reward, as well as the presence of a soft reserve, or early high-quality submission. We find that a higher reward induces significantly more submissions and submissions of higher quality. Furthermore, we find that high-quality users are significantly less likely to enter tasks where a high quality solution has already been submitted, resulting in lower overall quality in subsequent submissions in such soft reserve treatments.

An Experimenton Asymmetric Information in First-Price Common-Value Auctions: The Blessed Winner

Rajiv Sarin, with Brit Grosskopf and Lucas Rentschler

We study first-price, common-value auctions in three information structures: (1) symmetric information where no bidder observes a signal; (2) asymmetric information where only one bidder observes a signal; (3) symmetric information where each bidder observes a signal. In the asymmetric environment, the information rent of informed bidders is higher than predicted by theory, despite her overbidding. Bidders who observe a private signal tend to overbid while uninformed bidders tend to underbid, regardless of information structure. When neither bidder observes a private signal each typically underbids and a winner's blessing prevails. We investigate this result.

Our analysis suggests that the prevalence of the winner's curse in earlier studies is a function of private information.

The Demandfor Expressing Emotions

Brit Grosskopf, with Kristian Lopez

We experimentally study an economic interaction between two parties where one party experiences a negative emotional episode as a consequence of the interaction.

We investigate the material and welfare consequences of expression possibilities. Our experiment is based on a modified version of the Power–To–Take game where we elicit the material willingness to pay of the negatively affected side to express a response verbally. We find evidence that expression in such an environment, likely driven by the emotional state, does have a substantial material valuation with respect to the disposable resources. Therefore, whether or not expression is allowed has a real impact on wellbeing.

The Effectsof Happiness and Anger on Prosocial Behaviour

Michalis Drouvelis, with Brit Grosskopf

Abstract: We investigate the effects of induced emotions on pro-social behaviour in a one shot voluntary contributions mechanism where personal gains and group benefits are in conflict. The specific focus of our study is on the impact of anger and happiness. Our main finding suggests that, on average, subjects in the “happy” treatment contribute more than those in the “angry” treatment.

Homoeconomicus belief inhibits trust

Ziqiang Xin, with Guofang Liu

As a foundational concept in economics, the homo economicus assumption regards humans as rational and self-interested actors. In contrast, trust requires individuals to believe partners’ benevolence and unselfishness. Thus, the homo economicus belief may inhibit trust. The present three studies demonstrated that the direct exposure to homo economicus belief can weaken trust. And economic situations like profit calculation can also activate individuals’ homo economicus belief and inhibit their trust. It seems that people’s increasing homo economicus belief may serve as one cause of the worldwide decline of trust.

DoesGradualism Build Trust? Evidence from A Multi-round Experiment

Maoliang Ye

This paper examines the effect of gradualism -- increasing the stake of investment slowly over time rather than requiring a high stake of investment immediately -- in trust building using a multi-round trust (investment) experiment. I randomly assign subjects to three treatments: starting and continuing at a high stake (the “Big Bang” treatment), starting at a low stake but jumping to a high stake after a few rounds (the “Semi-gradualism” treatment), and starting at a low stake and gradually increasing the stake over time (the “Gradualism” treatment). In each round, two players of each group make their decisions sequentially. The first (“trustor”) makes a binary decision whether to pass the stake to the second one (“trustee”), which measures her trust. If she passes, the stake triples and the trustee then makes a binary decision: to return a low unfair amount or a high fair amount to the trustor, which measures his trustworthiness. I find that at the beginning the degree of trust is the same for all treatments, but trustworthiness is lower for the “Big Bang” treatment; as a result, the “Big Bang” treatment has a lower level of subsequent trust and a lower rate of successful cooperation (here cooperation is defined as “successful” if and only if both of the following conditions hold: the trustor is trusting and the trustee is trustworthy.). However, trustworthiness and trust for all treatments sharply decrease in the end (“end-of-game” effect).

HiddenCost of Giving

Sophia Xiaofei Pan, with Erte Xiao

Receiving a gift can create an impulse to reciprocate, even when doing so is inefficient and potentially harmful to a third party. Behavior in response to bribes is such an example. This paper investigates how the gift giver’s intentions impact a beneficiary’s desire to reciprocate the gift. We report data from a laboratory experiment showing that, when multiple givers attempt to offer gifts to a beneficiary, the intention of giving is not sufficient to trigger reciprocity.

Beneficiaries show strong favoritism towards one who was able to give, even when doing so is at the expense of those who attempted to give but were unable to do so. We further find that favoritism towards gift givers does not depend on whether giving is motivated by expected future returns. Our results suggest that further policies that aim to mitigate the ties between the donor and beneficiary are in need to prevent the social welfare loss.

Howhard to work: Experimentally Testing a Normative Model of Human Vigour

Ulrik Beierholm

The question of how humans and animals make behavioral choices has been the subject of an over-whelming number of studies. However, how vigorously to execute a choice has gathered less attention, with very few developed theoretical ideas. A study by Niv et al. (2006) suggested, based on the theory of average-return reinforcement learning, that vigor should be optimally controlled by the opportunity cost of time as measured by the average rate of reward. The study further suggested that the average rate of reward could be physiologically encoded by tonic dopamine in the brain. We have recently shown the influence of average rate of reward on vigor by presenting human subjects with slowly, but systematically, fluctuating reward rates for monetary outcomes, and measuring their reaction times (Guitart-Masip et al 2011). The current study examines the second hypothesis, linking dopamine to vigor and the average reward rate.

Ninety healthy subjects were invited to participate in the experiment and double-blindly administered either placebo, L-DOPA or citalopram. After a waiting period subjects performed multiple rounds of a rewarded odd-ball discrimination task where we varied the potential reward over time in order to exercise the purported link with the motivational system. As in our previous study we expected to see subjects' response times being negatively affected by the locally estimated rate of experienced reward (higher average reward rate causing faster responses). Note that this prediction goes in exactly the opposite direction of an obvious alternative, that the difference between the potential reward on a trial and the local average reward, should control vigor. Further based on our hypothesized link between dopamine and vigor we expected that this effect would be stronger in the L-DOPA than placebo group.

We performed an Expectation Maximization version of linear regression on the subjects' individual response times, using a collection of nuisance predictors and the regressor of interest, namely the time varying average expected reward. As in our previous study we found that after taking into account the nuisance parameters, a significant fraction of the variance in subjects' responses could be explained by this putative 'motivational signal'. Furthermore, we found a significantly stronger effect of this signal in the L-DOPA than placebo group.

This result implies not just that human vigor can be influenced by experienced reward in a manner that is consistent with predictions from a normative reinforcement learning model but that this ‘vigor signal’ is encoded by tonic dopamine in the brain.

Local Biasin Investor Attention: Evidence from China’s Internet Stock Message Boards

Yuqin Huang, with Wu Zhiguo, Qiu Huiyan

We attribute the local-bias puzzle to limited investor attention. In contrast to studies that focus on investment accounts, we examine local bias in investor attention by analyzing messages posted by investors on China’s Internet stock message boards. We find that individual investors pay more attention to the stocks of local companies than those of non-local companies. And local bias is particularly strong in underdeveloped regions, toward non-CSI 300 and low-turnover stocks, and toward stocks with names indicating their localities. Furthermore, the marginal effect of local bias is much stronger for distances within 500 kilometers.