Essays in Behavioral and Experimental Economics

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Behavioral economics aims to provide more realistic psychological foundations for economic models. Experimental methods can contribute to this effort by providing the ability to identify causal processes and motivations that can be confounded in field settings. The essays in this dissertation examine three critical issues in behavioral economics using lab and field experiments. The first two essays examine two core elements of economic rationality; expected utility theory and Bayesian updating. The essays consider, respectively, ambiguity, and information cascades, in environments in which limitations of the theories can be studied. The third essay examines a contracting game in which other-regarding preferences are explicitly considered.

Decision making under ambiguity has been of interest to economists since the 1920's (Knight (1921), Keynes (1921)). It has received renewed attention due to the work of Ellsberg (1961). In the first essay I examine the stability of ambiguity attitudes using a within subject design across individual choice and market environments. The evidence favors stability, with attitudes elicited from individuals strongly correlated with trading decisions in asset markets. The comparative ignorance hypothesis of Fox and Tversky (1995) developed for individual choice is also supported in the market setting shedding light on the causes of ambiguity aversion.

Previous empirical studies of information cascades have used either naturally occurring data or laboratory experiments. In the second essay attractive elements of each line of research are combined by observing market professionals from the Chicago Board of Trade (CBOT) in a controlled environment. Analysis of over 1500 decisions suggests that CBOT professionals behave differently than a student control group. Professionals are better able to discern the quality of public signals and their decisions are not affected by the domain of earnings. These results have important implications for market efficiency.

The contracting game studies both one and two principal settings. With one principal, behavior is consistent with a reputational model in which principals are successful in structuring contracts to insure against defections by agents imitating inequity-averse behavior. The complexity of the two principal setting creates more difficulties, but there is evidence that reciprocity between principals partially mitigates the adverse payoff consequences.