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Abstract:
We review recent developments in neuroeconomics and their implications for economics. The paper consists of six sections. Following the Introduction, the second section enumerates the different research methods that neuroscientists use evaluates their strengths and limitations for analyzing economic phenomena. The third section provides a review of basic findings in neuroscience that we deemed especially relevant to economics, and proposes a two-dimensional dichotomization of neural processes between automatic and controlled processes on the one hand, and cognitive and affective processes on the other. Section four reviews general implications of neuroscience for economics. Research in neuroscience, for example, raises questions about the usefulness of many economic constructs, such as 'time preference' and 'risk preference'. It also suggests that, contrary to the assumption that humans are likely to possess domain-specific intelligence - to be brilliant when it comes to problems that the brain is well evolved for performing and flat-footed for problems that lie outside of the brains existing specialized functions. Section 5 provides more detailed discussions of four specific applications: intertemporal choice, decision making under risk and uncertainty, game theory, and labor-market discrimination. Section 6 concludes by proposing a distinction between two general approaches in applying neuroscience to economics which we term 'incremental' and 'radical'. The former draws on neuroscience findings to refine existing economic models, while the latter poses more basic challenges to the standard economic understanding of human behavior.

Neuroeconomics, neuroscience

Abstract:
We use laboratory experiments to explore merger failure due to conflicting organizational cultures. We introduce a laboratory paradigm for studying organizational culture that captures several key elements of the phenomenon. In our experiments, we allow subjects in "firms" to develop a culture and then merge two firms. As expected, performance decreases following the merging of two laboratory firms. In addition, subjects over-estimate the performance of the merged firm and attribute the decrease in performance to other subjects rather than to situational difficulties created by conflicting culture.

Abstract:
This paper describes a parametric approach to weakening rationality assumptions in game theory to fit empirical data better. The central features of game theory are: The concept of a game (players, strategies, information, timing, outcomes); strategic thinking; mutual consistency of beliefs and strategies; and strategic foresight and Bayesian updating of unobserved "types" in repeated games. This paper describes a general four-parameter behavioral approach which relaxes the mutual consistency and foresight properties, while retaining much of the structure and hence the precision of game theory. One parameter measures the number of steps of iterated thinking that the average player does. This "thinking steps" model generates predictions about one-shot games and provides initial conditions for a theory of learning in repeated games. The learning theory adds one parameter (to measure response sensitivity) and adjusts learning parameters for environmental change (e.g., old experience is rapidly decayed when other players' moves are changing). It predicts behavior in new games more accurately than comparable models like fictitious play and reinforcement learning. The teaching theory assumes some fraction of players realize the impact of their current choices on future behavior of other players who learn, but does not impose equilibrium or updating assumptions as in standard approaches. The thinking-learning-teaching model is fit to many experimental data sets (a total of several thousand observations) including entry, mixed-equilibrium, "beauty contest", coordination, matrix games, and repeated trust games with incomplete information.

experimental economics, game theory, behavioral game theory, bounded rationality, behavioral economics, learning

Abstract:
Experimental games turned out to be remarkably productive tools for examining the nature of social preferences and social norms. This paper describes the methods and tools of experimental game
theory and provides a selection of games that have been useful. We also discuss the role of evolutionary explanations and of social preference theory in organizing the data in a coherent way.

Abstract:
Experimental games turned out to be remarkably productive tools for examining the nature of social preferences and social norms. This paper describes the methods and tools of experimental game
theory and provides a selection of games that have been useful. We also discuss the role of evolutionary explanations and of social preference theory in organizing the data in a coherent way.

Abstract:
We conducted experiments in Vietnamese villages to investigate how wealth, political history, occupation, and other demographic variables (taken from a comprehensive earlier household survey) are correlated with risk and time discounting measured in experiments. Experimental results show that in villages with higher mean income, people are less loss-averse and more patient. Villagers in the north who had worked on collective farms and received food from the government on a regular basis are less averse to loss.

We expand measurements of risk and time preferences beyond expected utility and exponential discounting, replacing those simple approximations with prospect theory and a three-parameter hyperbolic discounting model.

Prospect theory, Time discounting, Field experiment

Abstract:
Sixteen subjects' brain activity were scanned using FMRI as they made choices, expressed beliefs, and expressed iterated 2nd-order beliefs (what they think others believe they will do) in eight games. Cingulate cortex and prefrontal areas (active in theory of mind and social reasoning) are differentially activated in making choices versus expressing beliefs. Forming self-referential 2nd-order beliefs about what others think you will do seems to be a mixture of processes used to make choices and form beliefs. In equilibrium, there is little difference in neural activity across choice and belief tasks; there is a purely neural definition of equilibrium as a "state of mind". "Strategic IQ", actual earnings from choices and accurate beliefs, is negatively correlated with activity in the insula, suggesting poor strategic thinkers are too self-focused, and is positively correlated with ventral striatal activity (suggesting that high IQ subjects are spending more mental energy predicting rewards).

Neuroeconomics, fMRI, game theory, strategic, second order beliefs

Abstract:
In game-theoretic equilibrium, players' beliefs about choices by others are statistically correct. This "mutual consistency" assumption often predicts poorly in one-shot games. We develop an alternative "cognitive hierarchy" (CH) theory. In the CH model players who are not thinking strategically (0 steps) randomize. Players doing k steps of thinking predict accurately what lower-level players (steps 0 to k − 1) do, and best-respond given their beliefs. The model can explain why equilibration is so limited in some games (such as p-beauty contest), and surprisingly accurate in other games (such as business entry). The average number of thinking steps is about 1.5 across many games.

Abstract:
Curiosity has been described as the "wick in the candle of learning" but its underlying mechanisms are not well-understood. We scanned subjects with fMRI while they read trivia questions. The level of curiosity when reading questions is correlated with activity in caudate regions previously suggested to be involved in anticipated reward or encoding prediction error. This finding led to a behavioral study showing that subjects spend more scarce resources (either limited tokens, or waiting time) to find out answers when they are more curious. The fMRI also showed that curiosity increases activity in memory areas when subjects guess incorrectly, which suggests that curiosity may enhance memory for surprising new information. This prediction about memory enhancement is confirmed in a behavioral study- higher curiosity in the initial session is correlated with better recall of surprising answers 10 days later.

Neuroimaging, Memory, Learning, Brain

Abstract:
The existence of multiple equilibria is one explanation for why some countries are rich while others are poor. This explanation also allows the possibility that changes in political and economic institutions might help poor countries jump from a bad economic equilibrium into a better one, permanently increasing their output and income. Experiments are a useful methodology to study the effect of institutions on economic growth. In this paper, we study a simple experimental economy in which agents produce output in each period and can allocate the output between consumption and investment (the experiment adds to the design of Lei and Noussair, 2002, 2003). Capital productivity is higher if total investment is above a threshold. The threshold externality generates two equilibria - a suboptimal poverty trap and an optimal rich country equilibrium - which differ by a factor of around three in the income they create. In baseline sessions, in which agents make independent decisions in a decentralized manner, the economies typically sink into the poverty trap and the optimal equilibrium is never reached. However, the ability to communicate before investing, or to vote on binding industrial policy proposals, improves average earnings. Communication enables agents to agree to restrain consumption to cross the capital threshold, and voting enables them to enforce such plans. Combining both of these simple institutions enables all of the economies to escape the poverty trap. This experimental environment constitutes a platform onto which more complex features can be added in a program of experimental growth economics.

Economic growth, development, experimental economics, institutions, political economy

Abstract:
We explore the influence of tacit routines in obtaining coordination. Our experiment uses simple laboratory firms, in which we interfere with one kind of firm's ability to develop tacit routines. Thus, our firms vary in the degree to which they rely on this kind of knowledge - instead of other, explicit, mechanisms - for obtaining coordination. We find that interfering with the development of tacit routines harms firms' ability to coordinate. We then explore the extent to which firms are able to transfer their ability to coordinate activity, either to a new domain or to new members. Our results indicate that tacit routines transfer more easily than other mechanisms to a new, but closely related, domain. However, routine-based firms perform slightly worse in their ability to incorporate new members.

organizational coordination, experimental economics

Abstract:
Many psychology experiments show that individually judged probabilities of the same event can vary depending on the partition of the state space (a framing effect called partition-dependence). We show that these biases transfer to competitive prediction markets in which multiple informed traders are provided economic incentives to bet on their beliefs about events. We report results of a short controlled lab study, a longer field experiment (betting on the NBA playoffs and the FIFA World Cup), and naturally-occurring trading in macro-economic derivatives. The combined evidence suggests that partition-dependence can exist and persist in lab and field prediction markets.

prediction markets, framing efforts

Abstract:
Game theory is usually difficult to test precisely in the field because predictions typically depend sensitively on features that are not controlled or observed. We conduct a rare such test using field data from the lowest unique positive integer (LUPI) game. In the LUPI game, players pick positive integers and the player who chose the lowest unique number (not chosen by anyone else) wins a fixed prize. We derive theoretical equilibrium predictions, assuming fully rational players and Poisson-distributed uncertainty about the number of players. We also derive predictions for boundedly rational players using quantal response equilibrium, a cognitive hierarchy of rationality steps with quantal responses, as well as a simple learning model based on imitation. The theoretical predictions are tested using both field data from a Swedish gambling company, and laboratory data from a scaled-down version of the field game. The field and lab data show similar patterns: players choose very low and very high numbers too often, and avoid focal (round) numbers. However, there is learning and a surprising degree of convergence toward equilibrium. The cognitive hierarchy model with quantal responses can account for some of the basic discrepancies between the equilibrium prediction and the data, and the learning model can account for the adaptation towards equilibrium.

Population uncertainty, Poisson game, QRE, congestion game, guessing game, experimental methods, behavioral game theory, cognitive hierarchy

Abstract:
Film distributors occasionally withhold movies from critics before their release. Cold openings provide a natural field setting to test models of limited strategic thinking. In a set of 856 widely released movies, cold opening produces a significant 15% increase in domestic box office revenue (though not in foreign markets and DVD sales), consistent with the hypothesis that some moviegoers do not infer low quality from cold opening. Structural parameter estimates indicate 1-2 steps of strategic thinking by moviegoers (comparable to experimental estimates). However, movie studios appear to think moviegoers are sophisticated since only 7% of movies are opened cold.

behavioral game theory, limited strategic thinking, voluntary disclosure, experimental economics

Abstract:
We did experiments in a three-round bargaining game where the (perfect) equilibrium offer was $1.25 and an equal split was $2.50. The average offer was $2.11. Patterns of information search (measured with a computerized information display) show limited lookahead rather than backward induction. Equilibrium theories which adjust for social utilities (reflecting inequality-aversion or reciprocity) cannot explain the results because they predict subjects will make equilibrium offers to "robot" players, but offers to robots are only a little lower. When trained subjects (who quickly learned to do backward induction) bargained with untrained subjects, offers ended up halfway between equilibrium and $2.11.

bargaining, experimental economics, bounded rationality, behavioral economics, behavioral game theory, fairness, limited cognition

Abstract:
This paper tests two explanations for apparent undersaving in lifecycle models: Bounded rationality; and a preference for immediacy. Each was addressed in a separate experimental study. In first study, subjects saved too little initially - providing evidence for bounded rationality - but learned to save optimally within four repeated lifecycles. In the second study, thirsty subjects that consume beverage sips immediately rather than with a delay show greater relative overspending, consistent with quasi-hyperbolic discounting models. The parameter estimates of overspending obtained from the second study - but not the first - are in range of several empirical studies of savings (with an estimated [beta]=0.6-0.7).

behavioral economics, dynamic optimization, experimental economics, hyperbolic discounting, lifecycle savings, social learning

Abstract:
We report experiments on sender-receiver games with an incentive for senders to exaggerate. Subjects “overcommunicate” - messages are more informative of the true state than they should be, in equilibrium. Eyetracking shows that senders look at payoffs in a way that is consistent with a level-k model. A combination of sender messages and lookup patterns predicts the true state about twice as often as predicted by equilibrium. Using these measures to infer the state would enable receiver subjects to hypothetically earn 16-21 percent more than they actually do, an economic value of 60 percent of the maximum increment.

Cheap talk, Truth-bias, Lie detection, behavioral game theory, eyetracking, experimental economics, behavioral economics

Abstract:
Neuroeconomics uses knowledge about brain mechanisms to inform economic theory. It opens up the "black box" of the brain, much as organizational economics opened up the theory of the firm. Neuroscientists use many tools - including brain imaging, behavior of patients with brain damage, animal behavior and recording single neuron activity. The key insight for economics is that the brain is composed of multiple systems which interact. Controlled systems ("executive function") interrupt automatic ones. Brain evidence complicates standard assumptions about basic preference, to include homeostasis and other kinds of state-dependence, and shows emotional activation in ambiguous choice and strategic interaction.

Abstract:
Neuroeconomics seeks to ground economic theory in detailed neural mechanisms which are expressed mathematically and make behavioural predictions. One finding is that simple kinds of economising for life-and-death decisions (food, sex and danger) do occur in the brain as rational theories assume. Another set of findings appears to support the neural basis of constructs posited in behavioural economics, such as a preference for immediacy and nonlinear weighting of small and large probabilities. A third direction shows how understanding neural circuitry permits predictions and causal experiments which show state-dependence of revealed preference except that states are biological and neural variables.

Abstract:
In experiments, people do not always appear to think very strategically or to infer the information of others from their choices. We report experimental results in games of private information with three information states, which vary in strategic complexity. “Mousetracking” is used to record which game payoffs subjects look at, for how long, to learn more about the thinking process. Subjects often deviate from Nash equilibrium choices, converge only modestly toward equilibrium across 40 trials, and often fail to look at payoffs which they need to in order to compute an equilibrium response. Theories such as QRE and cursed equilibrium, which can explain nonequilibrium choices, are not well supported by the combination of both choices and lookups. When cluster analysis is used to group subjects according to lookup patterns and choices, the clusters appear to correspond approximately to level-3, level-2 and level-1 thinking in level-k cognitive hierarchy models. The connection between looking and choices is strong enough that the time durations of looking at key payoffs can predict choices, to some extent, at the individual level and at the trial-by-trial level.

Abstract:
We extend experience-weighted attraction (EWA) learning to games in which only the set of possible foregone payoffs from unchosen strategies are known, and estimate parameters separately for each player to study heterogeneity. We assume players estimate unknown foregone payoffs from a strategy, by substituting the last payoff actually received from that strategy, by clairvoyantly guessing the actual foregone payoff, or by averaging the set of possible foregone payoffs conditional on the actual outcomes. All three assumptions improve predictive accuracy of EWA. Individual parameter estimates suggest that players cluster into two separate subgroups (which differ from traditional reinforcement and belief learning).

Abstract:
We report results from an exploratory study using eye-tracking recording of information acquisition by players in a game theoretic learning paradigm. Eye-tracking is used to observe what information subjects look at in 4x4 normal-form games; the eye-tracking results favor sophisticated learning over adaptive learning and lend support to anticipatory or sophisticated models of learning in which subjects look at payoffs of other players to anticipate what those players might do. The decision data, however, are poorly fit by the simple anticipatory models we examine. We discuss how eye-tracking studies of information acquisition can fit into research agenda seeking to understand complex strategic behavior and consider methodological issues that must be addressed in order to maximize their potential.

Eye-tracking, reinforcement, self-tuned EWA, anticipatory learning

Abstract:
In experiments, people do not always appear to think very strategically or to infer the information of others from their choices. To understand this thinking process further, we use "Mousetracking" to record which game payoffs subjects look at, for how long, in games of private information with three information states, which vary in strategic complexity. Subjects often deviate from Nash equilibrium choices, converge only modestly toward equilibrium across 40 trials, and often fail to look at payoffs which they need to in order to compute an equilibrium response. Theories such as QRE and cursed equilibrium, which can explain non-equilibrium choices, are not well supported by the combination of both choices and lookups. When cluster analysis is used to group subjects according to lookup patterns and choices, the clusters appear to correspond approximately to level-3, level-2 and level-1 thinking in level-k cognitive hierarchy models. The connection between looking and choices is strong enough that the time durations of looking at key payoffs can predict choices, to some extent, at the individual level and at the trial-by-trial level.

asymmetric information, attention, laboratory experiment, mousetracking

Abstract:
We introduce an experimental approach to study the effect of institutions on economic growth. In each period, agents produce and trade output in a market, and allocate it to consumption and investment. Productivity is higher if total capital stock is above a threshold. The threshold externality generates two steady states – a suboptimal ‘poverty trap’ and an optimal steady state. In a baseline treatment, the economies converge to the poverty trap. However, the ability to make public announcements or to vote on competing and binding policies, increases output, welfare and capital stock. Combining these two simple institutions guarantees that the economies escape the poverty trap.

Abstract:
This paper examines the regulatory implications of behavioral economic insights. The central effect of behavioral economics in the legal literature to date has been to challenge the premise of formal economic theory that individuals understand their preferences and work to maximize these preferences. Behavioral economics has gathered increased attention in the economic analysis of law because of its demonstration that individual decisionmaking is prone to numerous biases and heuristics, and that as a result individuals may not act to realize their best interests. Part of the enthusiasm for behavioral economics in the legal literature has come from the apparent compatibility of the behavioral insights with proposals for paternalistic regulation. By pointing out some of the ways that human behavior falls short of perfect rationality, behavioral economics can potentially expand the scope of beneficial paternalistic policies that constrain individual choice. However, such policies should be implemented cautiously, given differences in opinion about what behaviors are irrational and concerns about costs imposed on people who are rational. In response to these concerns, we propose a principle for developing and evaluating regulatory policies that we term "asymmetric paternalism." Asymmetrically paternalistic regulations benefit those who would otherwise make poor decisions, but impose little or no costs on those who behave optimally. As such, they challenges both opponents and supporters of regulation by setting forth a disciplined set of criteria by which to judge the costs and benefits of regulatory proposals. The article explores the application of this principle to several specific sources of flawed decision making identified by behavioral economics in such diverse areas as retirement savings, consumer protection, and family law, and suggests examples of already existing regulations in these fields that seem to embody the principle of asymmetric paternalism.

behavioral economics, regulation, paternalism

Abstract:
We apply Camerer and Ho's experience-weighted attraction (EWA) model of learning to extensive-form signaling games. Since these games often have many equilibria, logical 'refinements' have been used to predict which equilibrium will occur. Brandts and Holt conjectured that belief formation could lead to less refined equilibria, and confirmed their conjecture experimentally. Our adaptation of EWA to signaling games includes a formalization of the Brandts-Holt belief formation idea as a special case. We find that the Brandts-Holt dynamic captures the direction of switching from one strategy to another, but does not capture the rate at which switching occurs. EWA does better at predicting the rate of switching (and also forecasts better than reinforcement models). Extensions of EWA which update unchosen signals by different functions of the set of unobserved foregone payoffs further improve predictive accuracy.

Keywords and Phrases: Learning, Game theory experiments, Signaling games, Equilibrium refinement.