scholarly journals Overconfidence and Diversification

2014 ◽  
Vol 6 (1) ◽  
pp. 134-153 ◽  
Author(s):  
Yuval Heller
Keyword(s):  
Experimental Evidence ◽  
Private Information ◽  
Risk Averse ◽  
Strategic Interactions ◽  
Stylized Facts ◽  
Aggregate Risk ◽  
Evolutionary Foundation

Experimental evidence suggests that people tend to be overconfident in the sense that they overestimate the accuracy of their private information. In this paper, we show that risk-averse principals might prefer overconfident agents in various strategic interactions because these agents help diversify the aggregate risk. This may help understanding why successful analysts and entrepreneurs tend to be overconfident. In addition, a different interpretation of the model presents a novel evolutionary foundation for overconfidence, and explains various stylized facts about this bias. (JEL D81, D82)

Pedestrians, Autonomous Vehicles, and Cities

2016 ◽  
Vol 38 (1) ◽  
pp. 6-12 ◽  
Author(s):  
Adam Millard-Ball
Keyword(s):  
Travel Behavior ◽  
Autonomous Vehicles ◽  
Autonomous Vehicle ◽  
Urban Neighborhoods ◽  
Urban Traffic ◽  
Risk Averse ◽  
Strategic Interactions ◽  
Road Users ◽  
Self Driving Cars ◽  
Time Autonomous

Autonomous vehicles, popularly known as self-driving cars, have the potential to transform travel behavior. However, existing analyses have ignored strategic interactions with other road users. In this article, I use game theory to analyze the interactions between pedestrians and autonomous vehicles, with a focus on yielding at crosswalks. Because autonomous vehicles will be risk-averse, the model suggests that pedestrians will be able to behave with impunity, and autonomous vehicles may facilitate a shift toward pedestrian-oriented urban neighborhoods. At the same time, autonomous vehicle adoption may be hampered by their strategic disadvantage that slows them down in urban traffic.

Loyalty Discounts

2013 ◽  
Vol 13 (2) ◽  
pp. 655-685 ◽  
Author(s):  
Uğur Akgün ◽  
Ioana Chioveanu
Keyword(s):  
Private Information ◽  
Risk Attitude ◽  
Differentiated Products ◽  
Quantity Discounts ◽  
Risk Averse ◽  
Product Substitution ◽  
Market Outcomes ◽  
Wide Range ◽  
Parameter Values ◽  
Pricing Schemes

Abstract This article analyses the use of loyalty inducing discounts in vertical supply chains. An upstream supplier and a competitive fringe sell differentiated products to a retailer who has private information about the stochastic demand. We compare the market outcomes, when the supplier uses two-part tariffs (2PT), all-unit quantity discounts (AU), and market-share discounts (MS). We show that the retailer’s risk attitude affects supplier’s preferences over these pricing schemes. When the retailer is risk neutral, it bears all the risk and the three schemes lead to the same outcome. When the retailer is risk averse, a 2PT performs the worst from the supplier’s perspective, but it leads to the highest welfare. For a wide range of parameter values (but not for all), the supplier prefers MS to AU. By limiting the retailer’s product substitution possibilities, MS makes the demand for the manufacturer’s product more inelastic. This reduces the amount (share of total profits) the supplier needs to leave to the retailer for the latter to participate in the scheme.

Bargaining under the Illusion of Transparency

2021 ◽  
Vol 111 (11) ◽  
pp. 3500-3539
Author(s):  
Kristóf Madarász
Keyword(s):  
Experimental Evidence ◽  
Private Information ◽  
Relative Speed ◽  
Common Prior ◽  
Illusion Of Transparency ◽  
Partial Reversal

This paper studies bargaining with noncommon priors where the buyer projects and exaggerates the probability that her private information may leak to the seller. Letting the buyer name her price first, raises the seller’s payoff above his payoff from posting a price. In seller-offer bargaining, projection implies a partial reversal of classic Coasian comparative static results. Weakening price commitment can benefit the seller and, as long as the relative speed at which imaginary information versus offers arrive does not converge to zero too quickly, frictionless bargaining converges to a fast haggling process which allows the seller to extract all surplus from trade. Bargaining under common prior transparency is instead slow and becomes equivalent to simply waiting. The comparative static predictions are consistent with experimental evidence. (JEL C78, D82)

Information asymmetry and incentive contracting with the tax department

2017 ◽  
Vol 16 (3) ◽  
pp. 385-402 ◽  
Author(s):  
Horn-chern Lin ◽  
Tao Zeng
Keyword(s):  
Theoretical Model ◽  
Information Asymmetry ◽  
Private Information ◽  
Relevant Information ◽  
Tax Planning ◽  
Risk Averse ◽  
Content Type ◽  
Incentive Schemes ◽  
The Impact ◽  
Optimal Incentives

Purpose This paper aims to examine the design of optimal incentives for a firm’s tax department in the presence of information asymmetry. Design/methodology/approach This paper provides a theoretical model to examine the design of optimal incentives. The focus is on a situation in which a risk-averse tax department has private information about its efficiency type or effort to be exerted before the firm sets the incentive schemes. Findings This paper shows that a tax department’s risk aversion leads to a decline in the fraction of the cost borne by the tax department. It also shows that the optimal contract schemes should be designed to filter out as much uncontrollable risk as possible by using third-party information relevant to a tax department’s realized cost. Social implications It contributes to a better understanding of the impact of corporate incentive plans on firms’ tax practices. This study, by designing a theoretical model, helps explain why there exist differences in tax planning across firms based on the finding that incentives for tax planning activities differ across firms. Originality/value This paper is the first study that considers the situation in which tax managers’ risk-averse and types, as well as relevant information collected by the firms, can be used to set up incentive schemes and investigates whether and how the incentive schemes will be affected when firms improve their prior information by acquiring relevant information before the tax department acts.

scholarly journals Is there a link between endowment inequality and deception? – An analysis of students and chess players

2020 ◽  
Author(s):  
Sven Gruener ◽  
Ilia Khassine
Keyword(s):  
Private Information ◽  
Common Knowledge ◽  
Basic Design ◽  
Initial Endowment ◽  
Strategic Interactions ◽  
Standard Population ◽  
Deception Game ◽  
Chess Players ◽  
The Relationship ◽  
Two Alternatives

This paper investigates experimentally the relationship between inequality in endowment and deception. Our basic design is adopted from Gneezy (2005): two players interact in a deception game. It is common knowledge that player 1 has private information about the payoffs for both players of two alternative ac-tions. Player 1 sends a message to player 2, indicating which alternative putatively will end up in a higher payoff for player 2. The message, which can either be true or false, does not affect the payoffs of the players. Player 2 has no information about the payoffs. However, player 2 selects one of the two alternatives A or B, which is payoff-relevant for both players. Our paper adds value to the literature by extending Gneezy (2005) in two elements. First, we systematically vary the initial endowment of the players 1 and 2 (common knowledge to both of them). Second, we do not limit ourselves to the standard population of university students but also recruit chess players that are not enrolled in any degree program. Doing so, we want to find out if our results remain robust over a non-standard subject population which is known to be experienced to some extent in strategic interactions. Our main findings are: (i) non-students behave more honestly than students, (ii) students are more likely to trust the opponent’s message, and (iii) students and non-students be-have differently to variation in initial endowment.

Expectation Formation Following Large, Unexpected Shocks

2020 ◽  
Vol 102 (2) ◽  
pp. 287-303 ◽  
Author(s):  
Scott R. Baker ◽  
Tucker S. McElroy ◽  
Xuguang S. Sheng
Keyword(s):  
Natural Disasters ◽  
Natural Disaster ◽  
Private Information ◽  
Learning Model ◽  
Large Database ◽  
Stylized Facts ◽  
Expectation Formation ◽  
Attention Effect ◽  
Information Rigidity ◽  
The Universe

By matching a large database of individual macroforecaster data with the universe of sizable natural disasters across 54 countries, we identify a set of new stylized facts: forecasters are persistently heterogeneous in how often they issue or revise a forecast; information rigidity declines significantly following large, unexpected natural disaster shocks; and disagreement decreases among inattentive agents while it might increase for attentive ones. We develop a learning model that captures the two channels through which natural disaster shocks affect expectation formation: attention effect—the visibly large shocks induce immediate and synchronized updating of information for inattentive agents—and uncertainty effect—attentive agents might increase their acquisition of private information to compensate for the higher uncertainty after shocks.

scholarly journals Evolutionary Models of Preference Formation

2019 ◽  
Vol 11 (1) ◽  
pp. 329-354 ◽  
Author(s):  
Ingela Alger ◽  
Jörgen W. Weibull
Keyword(s):  
Private Information ◽  
Complete Information ◽  
Evolutionary Models ◽  
Strategic Interactions ◽  
Preference Formation ◽  
Homo Economicus ◽  
Local Dispersion ◽  
Self Interest ◽  
Evolutionary Success ◽  
Evolution Of Preferences

The literature on the evolution of preferences of individuals in strategic interactions is vast and diverse. We organize the discussion around the following question: Supposing that material outcomes drive evolutionary success, under what circumstances does evolution promote Homo economicus, defined as material self-interest, and when does it instead lead to other preferences? The literature suggests that Homo economicus is favored by evolution only when individuals’ preferences are their private information and the population is large and well-mixed, so that individuals with rare mutant preferences almost never get to interact with each other. If rare mutants instead interact more often (say, due to local dispersion), then evolution instead favors a certain generalization of Homo economicus including a Kantian concern. If individuals interact under complete information about preferences, then evolution destabilizes Homo economicus in virtually all games.

scholarly journals Sovereign Debt Restructurings: Delays in Renegotiations and Risk Averse Creditors

2020 ◽  
Vol 18 (5) ◽  
pp. 2394-2440 ◽  
Author(s):  
Tamon Asonuma ◽  
Hyungseok Joo
Keyword(s):  
Quantitative Analysis ◽  
Theoretical Model ◽  
Business Cycles ◽  
Sovereign Debt ◽  
Gdp Growth ◽  
Risk Averse ◽  
Stylized Facts ◽  
Theoretical Predictions ◽  
Financial Cycles

Abstract Foreign creditors’ business cycles influence both the process and the outcome of sovereign debt restructurings. We compile two datasets on creditor committees and chairs and on creditor business and financial cycles at the restructurings. We find that when creditors experience high GDP growth, restructurings are delayed and settled with smaller haircuts. To rationalize these stylized facts, we develop a theoretical model of sovereign debt with multiround renegotiations between a risk averse sovereign debtor and a risk averse creditor. The quantitative analysis of the model shows that high creditor income results in both longer delays in renegotiations and smaller haircuts. Our theoretical predictions are supported by data.

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