We report on an experimental investigation of the emergence of Spontaneous Order, the idea that s... more We report on an experimental investigation of the emergence of Spontaneous Order, the idea that societies can co-ordinate, without government intervention, on a form of society that is good for its citizens, as described by Adam Smith. Our experimental design is based on a production game with a convex input provision possibility frontier, where subjects have to choose a point on this frontier. We start with a simple society consisting of just two people, two inputs, one final good and in which the production process exhibits returns to specialisation. We then study more complex societies by increasing the size of the society (groups of 6 and 9 subjects) and the number of inputs (6 and 9 inputs respectively), as well as the combinations of inputs that each subject can provide. This form of production can be characterised as a cooperative game, where the Nash equilibrium predicts that the optimal outcome is achieved when each member of this society specialises in the provision of a s...
This paper is about behaviour under ambiguity-that is, a situation in which probabilities either ... more This paper is about behaviour under ambiguity-that is, a situation in which probabilities either do not exist or are not known. Our objective is to find the most empirically valid of the increasingly large number of theories attempting to explain such behaviour. We use experimentally-generated data to compare and contrast the theories. The incentivised experimental task we employed was that of allocation: in a series of problems we gave the subjects an amount of money and asked them to allocate the money over three accounts, the payoffs to them being contingent on a 'state of the world' with the occurrence of the states being ambiguous. We reproduced ambiguity in the laboratory using a Bingo Blower. We fitted the most popular and apparently empirically valid preference functionals [Subjective Expected Utility (SEU), MaxMin Expected Utility (MEU) and α-MEU], as well as Mean-Variance (MV) and a heuristic rule, Safety First (SF). We found that SEU fits better than MV and SF and only slightly worse than MEU and α-MEU.
Dynamically inconsistent decision makers have to decide, implicitly or explicitly, what to do abo... more Dynamically inconsistent decision makers have to decide, implicitly or explicitly, what to do about their dynamic inconsistency. Economic theorists have identified three possible responses-to act naively (thus ignoring the dynamic inconsistency), to act resolutely (not letting their inconsistency affect their behaviour) or to act sophisticatedly (hence taking into account their inconsistency). We use data from a unique experiment (which observes both decisions and evaluations) in order to distinguish these three possibilities. We find that the majority of subjects are either naïve or resolute (with slightly more being naïve) but very few are sophisticated. These results have important implications for predicting the behaviour of people in dynamic situations.
Models and Experiments in Risk and Rationality, 1994
ESTIMATION OF EXPECTED UTILITY AND NON-EXPECTED UTILITY PREFERENCE FUNCTIONALS USING COMPLETE RAN... more ESTIMATION OF EXPECTED UTILITY AND NON-EXPECTED UTILITY PREFERENCE FUNCTIONALS USING COMPLETE RANKING DATA1 Enrica Carbone and John D. Hey2 University of York 1-INTRODUCTION In recent years, there have been many empirical investigations into ...
Central to many theoretical accounts of the process by which (rational) people tackle dynamic dec... more Central to many theoretical accounts of the process by which (rational) people tackle dynamic decision problems is the concept of a plan: a set of conditional decisions as to what would be decided under certain conditions (imposed by Nature). The notion of a plan is clearly central to theories of dynamic decision making in which backward induction and the Principle of Optimality are invoked. To many theorists, the adoption and subsequent implementation of a plan are almost axioms of rational behaviour. These theorists ask two questions: how can dynamic decisions be taken in the absence of a plan; why would anyone want to change the plan once it is embarked upon. Experimental economists have begun to explore the implications of these notions. For example, work by Robin Cubitt and his associates has investigated whether the way a dynamic decision problem is formulated and presented to the subjects has any effect on the decisions taken by the subjects; if the subjects have a plan, and implement it in the sense discussed above, there should be no effect. Cubitt and his associates find some effect. With Massimo Paradiso I have investigated whether subjects have preferences over different formulations and presentations, for example, whether subjects prefer to be forced to pre-commit themselves (to a plan) or whether they prefer the flexibility of not being pre-committed. Of course, if subjects have a plan in the sense discussed above they should be indifferent between all such alternative formulations (of the same choice problem). However, we find they are not. Of course, subjects could behave the same yet have differing preferences; they could, conceivably also have identical preferences but behave differently, but neither of these types of experiments casts direct light on the key question as to whether subjects have plans and implement them. This is the purpose of the new experiments reported in this paper. These experiments were difficult to design because of the difficulty of observing correctly whether a plan exists in the subject's mind, and particularly because of the difficulty of getting the subject to honestly reveal the existence and nature of a plan. The problem is simple: if the subject is not going to be forced to follow the announced plan, what incentive is there for reporting it honestly? And if the subject is forced to follow the announced plan, then the dynamic choice problem has been transformed into a static (pre-commitment) choice problem-and the very thing that we want to examine has been transformed away. We have an experimental design which overcomes these problems. The paper reports on the results of an experiment carried out by ESSE (Economia Sperimentale al Sud d'Europa) in Bari.
We report on an experimental investigation of the emergence of Spontaneous Order, the idea that s... more We report on an experimental investigation of the emergence of Spontaneous Order, the idea that societies can co-ordinate, without government intervention, on a form of society that is good for its citizens, as described by Adam Smith. Our experimental design is based on a production game with a convex input provision possibility frontier, where subjects have to choose a point on this frontier. We start with a simple society consisting of just two people, two inputs, one final good and in which the production process exhibits returns to specialisation. We then study more complex societies by increasing the size of the society (groups of 6 and 9 subjects) and the number of inputs (6 and 9 inputs respectively), as well as the combinations of inputs that each subject can provide. This form of production can be characterised as a cooperative game, where the Nash equilibrium predicts that the optimal outcome is achieved when each member of this society specialises in the provision of a s...
This paper is about behaviour under ambiguity-that is, a situation in which probabilities either ... more This paper is about behaviour under ambiguity-that is, a situation in which probabilities either do not exist or are not known. Our objective is to find the most empirically valid of the increasingly large number of theories attempting to explain such behaviour. We use experimentally-generated data to compare and contrast the theories. The incentivised experimental task we employed was that of allocation: in a series of problems we gave the subjects an amount of money and asked them to allocate the money over three accounts, the payoffs to them being contingent on a 'state of the world' with the occurrence of the states being ambiguous. We reproduced ambiguity in the laboratory using a Bingo Blower. We fitted the most popular and apparently empirically valid preference functionals [Subjective Expected Utility (SEU), MaxMin Expected Utility (MEU) and α-MEU], as well as Mean-Variance (MV) and a heuristic rule, Safety First (SF). We found that SEU fits better than MV and SF and only slightly worse than MEU and α-MEU.
Dynamically inconsistent decision makers have to decide, implicitly or explicitly, what to do abo... more Dynamically inconsistent decision makers have to decide, implicitly or explicitly, what to do about their dynamic inconsistency. Economic theorists have identified three possible responses-to act naively (thus ignoring the dynamic inconsistency), to act resolutely (not letting their inconsistency affect their behaviour) or to act sophisticatedly (hence taking into account their inconsistency). We use data from a unique experiment (which observes both decisions and evaluations) in order to distinguish these three possibilities. We find that the majority of subjects are either naïve or resolute (with slightly more being naïve) but very few are sophisticated. These results have important implications for predicting the behaviour of people in dynamic situations.
Models and Experiments in Risk and Rationality, 1994
ESTIMATION OF EXPECTED UTILITY AND NON-EXPECTED UTILITY PREFERENCE FUNCTIONALS USING COMPLETE RAN... more ESTIMATION OF EXPECTED UTILITY AND NON-EXPECTED UTILITY PREFERENCE FUNCTIONALS USING COMPLETE RANKING DATA1 Enrica Carbone and John D. Hey2 University of York 1-INTRODUCTION In recent years, there have been many empirical investigations into ...
Central to many theoretical accounts of the process by which (rational) people tackle dynamic dec... more Central to many theoretical accounts of the process by which (rational) people tackle dynamic decision problems is the concept of a plan: a set of conditional decisions as to what would be decided under certain conditions (imposed by Nature). The notion of a plan is clearly central to theories of dynamic decision making in which backward induction and the Principle of Optimality are invoked. To many theorists, the adoption and subsequent implementation of a plan are almost axioms of rational behaviour. These theorists ask two questions: how can dynamic decisions be taken in the absence of a plan; why would anyone want to change the plan once it is embarked upon. Experimental economists have begun to explore the implications of these notions. For example, work by Robin Cubitt and his associates has investigated whether the way a dynamic decision problem is formulated and presented to the subjects has any effect on the decisions taken by the subjects; if the subjects have a plan, and implement it in the sense discussed above, there should be no effect. Cubitt and his associates find some effect. With Massimo Paradiso I have investigated whether subjects have preferences over different formulations and presentations, for example, whether subjects prefer to be forced to pre-commit themselves (to a plan) or whether they prefer the flexibility of not being pre-committed. Of course, if subjects have a plan in the sense discussed above they should be indifferent between all such alternative formulations (of the same choice problem). However, we find they are not. Of course, subjects could behave the same yet have differing preferences; they could, conceivably also have identical preferences but behave differently, but neither of these types of experiments casts direct light on the key question as to whether subjects have plans and implement them. This is the purpose of the new experiments reported in this paper. These experiments were difficult to design because of the difficulty of observing correctly whether a plan exists in the subject's mind, and particularly because of the difficulty of getting the subject to honestly reveal the existence and nature of a plan. The problem is simple: if the subject is not going to be forced to follow the announced plan, what incentive is there for reporting it honestly? And if the subject is forced to follow the announced plan, then the dynamic choice problem has been transformed into a static (pre-commitment) choice problem-and the very thing that we want to examine has been transformed away. We have an experimental design which overcomes these problems. The paper reports on the results of an experiment carried out by ESSE (Economia Sperimentale al Sud d'Europa) in Bari.
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