Think Twice Before Running! Bank Runs and Cognitive Abilities

27 Pages Posted: 12 Nov 2014

See all articles by Hubert Janos Kiss

Hubert Janos Kiss

Eötvös Loránd University; Hungarian Academy of Sciences (HAS) - Institute of Economics CERS-HAS (IEHAS)

Ismael Rodriguez-Lara

University of Granada - Campus La Cartuja

Alfonso Rosa-Garcia

Universidad Católica San Antonio de Murcia

Date Written: September 4, 2014

Abstract

We assess the impact of cognitive abilities on withdrawal decisions in a bank-run game. In our setup, depositors choose sequentially between withdrawing or keeping their funds deposited in a common bank. They may observe previous decisions depending on the information structure. Theoretically, the last depositor in the sequence of decisions has a dominant strategy and should always keep the funds deposited, regardless of what she observes (if anything). Recognizing the dominant strategy, however, is not always straightforward. If there exists strategic uncertainty (e.g., the last depositor has no information about predecessors’ decisions) the identification of the dominant strategy requires harder thinking than when there is not strategic uncertainty (e.g., the last depositor is informed about all previous decisions). We find that cognitive abilities, as measured by the Cognitive Reflection Test (CRT), predict withdrawals in the presence of strategic uncertainty (participants with higher abilities tend to identify the dominant strategy more easily) but the CRT does not predict behavior when there is no strategic uncertainty.

Keywords: bank runs, coordination game, observability of actions, cognitive abilities, strategic uncertainty

JEL Classification: C91, D03, D8, G02, J16

Suggested Citation

Kiss, Hubert Janos and Rodriguez-Lara, Ismael and Rosa-Garcia, Alfonso, Think Twice Before Running! Bank Runs and Cognitive Abilities (September 4, 2014). Available at SSRN: https://ssrn.com/abstract=2522472 or http://dx.doi.org/10.2139/ssrn.2522472

Hubert Janos Kiss (Contact Author)

Eötvös Loránd University ( email )

Pazmany Peter setany 1A
Budapest, -- H1117
Hungary

Hungarian Academy of Sciences (HAS) - Institute of Economics CERS-HAS (IEHAS) ( email )

Budaorsi ut 45
Budapest, 1112
Hungary

Ismael Rodriguez-Lara

University of Granada - Campus La Cartuja ( email )

Campus La Cartuja
Granada
Spain

Alfonso Rosa-Garcia

Universidad Católica San Antonio de Murcia ( email )

Avenida Jerónimos, 135
Guadalupe
Murcia, 30107
Spain

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