From left to right: Koala; Joep Sonnemans
Professor of Behavioral Economics at the
Faculty of Economics and Econometrics of the
University of Amsterdam
Phone: +31 (0)20 525 4249
Background and interests
I graduated in mathematics and social psychology at the University of Utrecht. After working as a researcher on social security at the Ministry of Social affairs and as a research
associate in psychology at the University of Amsterdam (where I obtained my doctorate degree), I joined CREED in February 1992. I am mainly interested in (experimental) research in which insights from economics and other social sciences (e.g. psychology) are combined or contrasted: expectation formation, bargaining, social
behavior, law & economics and individual search behavior (see the abstracts of working papers and publications below). In recent years I have become interested in behavioral finance and behavioral economics. Part of the research is done in the Center for Nonlinear Dynamics in Economics and Finance (CeNDEF). I am a member of the editorial board of Quantitative Finance and the Journal of Economic Psychology and I have been an Associate Editor of the European Economic Review from 2006-2012.
I am also a Research Fellow of the Tinbergen Institute. Visit my Google.Scholar profile.
A list of my co-authors can be found here.
Other (non-working related) interests are modern literature, modern art and vegetarian cooking.
WORKING PAPERS 2021
(2021) The effect of futures markets on the stability of commodity prices PDF-file Do futures markets have a stabilizing or destabilizing effect on commodity prices? The empirical evidence is inconclusive. We try to resolve this question by means of a learning-to-forecast experiment in which a futures market and a spot market are coupled. The strength of the coupling depends positively on the number of speculators on the futures market and negatively on storage costs and speculator risk aversion. We find that the spot price volatility changes non-monotonically with the strength of the coupling, resulting in a stabilizing effect on spot prices for weakly coupled markets and a destabilizing effect when the coupling with the futures market is strong.
WORKING PAPERS 2020
(2020) The effect of quantity and quality of information in strategy tournaments PDF-file It is increasingly common for algorithms rather than people to take complex decisions. Many of those algorithms are however written by people and the information available to them when developing an algorithm will influence the algorithm they write. We implement such a setting in a controlled environment where participants program an explicit strategy to play the minority game on their behalf in a multi-round strategy tournament. Given the large strategy space and multiplicity of equilibria of the minority game, developing a successful strategy is no easy task. Over three experiments we vary the information available to participants to study whether more or better information can help people to improve their strategies over time. Providing participants with the strategies played by others turns out to reduce overall performance, while reducing the noise in feedback about the potential performance of a strategy under consideration increases efficiency. We argue that these different information structures put different types of strategies in a good light. The increased popularity of the favored strategies in turn drives overall efficiency.
(2021) Bubbles, crashes and information contagion in large-group asset market experiments Experimental Economics 24, 414-433 Link to article We study the emergence of bubbles in a laboratory experiment with large groups of individuals. The realized price is the aggregation of the forecasts of a group of individuals, with positive expectations feedback through speculative demand. When prices deviate from fundamental value, a random selection of participants receives news about overvaluation. Our findings are: (i) large asset bubbles occur in large groups, (ii) information contagion through news affects behaviour and may break the coordination on a bubble, (iii) time varying heterogeneity provides an accurate explanation of bubble formation and crashes, and (iv) bubbles are strongly amplified by coordination on trend-extrapolation.
(2020) Endogenous group formation and responsibility diffusion: An experimental study. Games and Economic Behavior 121, 1-31 Link to article We study the effects of varying individual pivotality and endogenous group entry on the selfishness of group decisions. Selfish choices by groups are often linked to the possibility of diffusing responsibility; the moral costs of these decisions appear smaller when individual pivotality is reduced. Our experimental design explores unanimity voting under distinct defaults to identify this effect. In exogenously formed groups we find evidence of responsibility diffusion, but this diminishes with repetition. Our results also demonstrate the role of self-selection in generating differences in group behaviour depending on individual pivotality. Driven by a heterogeneous selection pattern, endogenous group formation amplifies the effects of a change in pivotality. Some people actively seek an environment to diffuse responsibility, while others join groups to promote pro-social behaviour.
(2019) The influence of the strength of financial institutions and the investment-production delay on commodity price cycles: a framed field experiment with coffee farmers in Colombia De Economist 167, 347-358 Link to article Commodity price cycles can arise when there is a tendency to invest more (less) when current prices are high (low). Traditionally this behavior is interpreted as based upon naïve expectations. However, weak financial institutions can also cause this behavior. When borrowing is hard and saving is risky farmers cannot invest in periods with low prices because their income is too low, while in periods with high prices they have few alternatives than to invest the surplus in their farm. In this paper, we present a framed field experiment to analyze how Colombian small-scale coffee farmers make investment decisions. We vary the strength of the financial institutions and the lag between investment and production. Overall there is a positive relation between prices and investment, and this relation becomes stronger when the financial institutions become weaker.
(2018) Nonrenewable Resources, Strategic Behavior and the Hotelling Rule: An Experiment Journal of Industrial Economics 66, 481-516 Link to article We use a laboratory experiment to investigate a novel reason for the lack of empirical support for the Hotelling rule for nonrenewable resources. Specifically, we test whether producers with large resource stocks focus less on the dynamic component of their extraction decision, making them shift extraction to the present and focus more on strategic behavior. Exploiting exogenous variation in stock size in a nonrenewable resource duopoly laboratory experiment, we find that producers with large stocks indeed pay significantly less attention to dynamic optimization, and shift extraction to the present, leading them to overproduce relative to the Hotelling rule. (2018) Peers at work: Evidence from the lab PLOS one 13, Link to article This paper reports the results of a lab experiment designed to study the role of observability for peer effects in the setting of a simple production task. In our experiment, participants in the role of workers engage in a team real-effort task. We vary whether they can observe, or be observed by, one of their co-workers. In contrast to earlier findings from the field, we find no evidence that low-productivity workers perform better when they are observed by high-productivity co-workers. Instead, our results imply that peer effects in our experiment are heterogeneous, with some workers reciprocating a high-productivity co-worker but others taking the opportunity to free ride. (2018) An Economic Approach on Countering the Misuse of the Right to Challenge Judges: an experiment European Journal of Law and Economics 45, 29-57 Link to article Parties can challenge a judge (request a recusal) when they have reasons to believe that a judge is not impartial. In practice this procedure is sometimes abused by lawyers who, for example, want to delay proceedings. Countries have taken different measures to deter the improper use of the procedure to request a recusal, like fines for dismissed requests, or immediately dismissing evidently unfounded requests. In a laboratory experiment we examine the effects of a summary review whether a challenge is evidently unfounded, with or without fines. We find that a review without fine improves legal protection in practice as well as efficiency by reducing unfounded challenges and increasing challenges that have a substantial chance of success. Overall the number of challenges declines. With a fine, challenges decline, but also legal protection. (2018) Does the elicitation method impact the WTA/WTP disparity? Journal of Behavioral and Experimental Economics 73, 40-45 PDF-file Link to article The size of the Willingness To Accept (WTA)/Willingness To Pay (WTP) disparity is compared using the Becker-DeGroot-Marschak (BDM) and multiple price list (MPL) methods. A robust WTA/WTP disparity is found using both elicitation methods. The MPL elicitation method appears to result in a slightly larger effect compared with the BDM method, contradicting claims that misconceptions specific to the BDM method are a driving force of the WTA/WTP disparity.
(2017) Other-regarding Preferences, In-Group Bias and Political Participation: an experiment Journal of Economic Psychology 62, 130-154 Link to article This paper presents an experimental study on the relationship between other-regarding preferences, in-group bias and political participation. We conjecture that subjects who are more other-regarding and exhibit higher in-group bias are more likely to bear the costs of participating in group action. Using a participation game, we implement laboratory elections in which two groups compete for victory. We induce different levels of in-group bias across subjects in order to implement treatments in which the competing groups are either highly biased towards the own group vis-à-vis the other one or are characterized by low levels of such in-group bias. Our results show that, at the aggregate level, participation is higher in environments where in-group bias is more pronounced. Furthermore, the least other-regarding subjects participate much less often that others, while the more other-regarding sustain high participation levels. These findings suggest that interpersonal preferences and intergroup bonds can explain the higher participation of close-knit (political) groups observed in the field. (2017) The Endowment Effect in Games European Economic Review 94, 240-262 Link to article In a laboratory experiment we study whether the endowment effect exists in a social and strategic context. We employ a within-subjects design whereby participants are asked for their Willingness-to-Accept (WTA) or Willingness-to-Pay (WTP) to play a series of 2x2 games. In the second part of the experiment, we study the endowment effect in lotteries with the same payoffs as the games in the first part. Our findings provide robust evidence for the endowment effect both in games and in lotteries, with the size of the effect actually being larger in games than in lotteries. We also find that the endowment effect can partly be attributed to optimism.
(2016) Firm-specific information and explicit collusion in experimental oligopolies European Economic Review 82, 132-141 Link to article We experimentally study the effect of information about competitors’ actions on cartel stability and firms’ incentives to form cartels in Cournot markets. As in previous experiments, markets become very competitive when individualized information is available and participants cannot communicate. In contrast, when communication is possible, results reverse: Markets become less competitive and cartels become more stable when individualized information is available. We also observe that the extra profits that firms obtain thanks to the possibility to communicate are higher when individualized information is present, suggesting that firms have greater incentives to form cartels in that situation.
(2015) Decisions under risk in a social and individual context: The limits of social preferences? Journal of Behavioral and Experimental Economics 56, 62-71 Link to article (An earlier version of this paper was titled: “Social Preferences in Private Decisions”) Social preference models were originally constructed to explain why people spend money to affect the earnings of others. These social preference theories are now widely used to model situations where decision makers do not influence the earnings of others, for example the labor market. Outcome-based social preference models make predictions in these settings as well. We therefore test these models in a novel experimental situation where participants face risky decisions that affect only their own earnings. In the social (individual) treatment participants do (not) observe the earnings of others. In the social treatment gambles therefore not only affect absolute but also relative earnings. All outcome-based social preference models predict a treatment difference. We find that decisions are generally the same in both treatments, which suggests these models are less general applicable than their formulation suggests.
(2014) Judicial error by groups and individuals Journal of Economic Behavior and Organization 108, 224-235 Link to article In criminal cases judges evaluate and combine probabilistic evidence to reach verdicts. Unavoidably, errors are made, resulting in unwarranted conviction or acquittal of defendants. This paper addresses the questions (1) whether hearing cases by teams of three persons leads to less error than hearing cases alone; (2) whether deliberation leads to better decisions than mechanical aggregation of individual opinions; and (3) whether participating in deliberations improves future individual decisions. We find that having more than one judge consider cases reduces error effectively. This does not mean that it is necessary to deliberate about all cases. In simple cases many errors can be avoided by mechanical aggregation of independent opinions, and deliberation has no added value. In difficult cases discussion leads to less error. The advantage of deliberation goes beyond the case at hand: although we provide no feedback about the quality of verdicts, it improves individual decisions in subsequent cases. (2014) Strategies and Evolution in the Minority Game: A Multi-Round Strategy Experiment Games and Economic Behavior 86, 77–95 Link to article Minority games are a stylized description of strategic situations with both coordination and competition. These games are widely studied using either simulations or laboratory experiments. Simulations can show the dynamics of aggregate behavior, but the results of such simulations depend on the type of strategies used. So far experiments provided little guidance on the type of strategies people use because the set of possible strategies is very large. We therefore use a multi-round strategy method experiment to directly elicit people’s strategies. Between rounds participants can adjust their strategy and test the performance of (possible) new strategies against strategies from the previous round. Strategies gathered in the experiment are subjected to an evolutionary competition. The strategies people use are very heterogeneous although aggregate outcomes resemble the symmetric Nash equilibrium. The strategies that survive evolutionary competition achieve much higher levels of coordination.
(2013) Gift exchange and the separation of ownership and control. Games and Economic Behavior 77, 41-60 Link to article Abstract
Numerous gift exchange experiments have found a positive wage-effort relationship. In (almost) all these experiments the employer both owns and controls the firm. This paper explores to what extent the separation of ownership and control affects the wage-effort relationship. We compare the standard bilateral gift exchange game between an owner-manager and a worker with two trilateral ones where the firm is owned by a shareholder and controlled by a manager. The wage-effort relationship is similar in all three situations. Most strikingly, workers reward higher wages with higher effort, even when the
manager does not share in the firm’s profits.
(2012) Errors in judicial decisions: experimental evidence Journal of Law, Economics, and Organization 28, 687-716 Appendix Link to article In criminal cases the task of the judge is foremost to transform the uncertainty about the facts into the certainty of the verdict. An extensive literature shows that people deviate from rationality when dealing with probability. It seems therefore unavoidable that in difficult criminal cases miscarriages of justice occur, but this is hard to study in the field. In a laboratory experiment we examine the relationship between evidence of which the diagnostic value is known, subjective probability of guilt and errors in verdicts for abstract criminal cases. We look at two situations: (1) all evidence is given and (2) evidence can be acquired. In both situations verdicts are inaccurate. For given evidence, errors are biased towards the most serious type, unfounded conviction. In the situation where evidence can be acquired, participants do not acquire enough which results in many mistakes, evenly divided over unfounded convictions and unfounded acquittals. We suggest ways to reduce error. (2012) Social Comparison and Risky Choices Journal of Risk and Uncertainty 44, 45-72 Link to article Theories (and experiments) on decision making under risk typically ignore (and exclude) a social context. We explore whether this omission is detrimental. To do so we experimentally investigate the simplest possible situation with both social comparison and risk: participants choose between two lotteries while a referent faces a fixed payoff. Participants are more risk averse when they can earn at most as much as their referent (loss situation) than when they are ensured they will earn at least as much as their referent (gain situation). Prospect theory with a social reference point would predict the exact opposite behavior. These results show that straightforward extensions of existing theories to allow for social comparison do not provide accurate predictions. (2012) Individual Expectations, Limited Rationality and Aggregate Outcomes Journal of Economic Dynamics and Control 36, 1101-1120 Link to article Recent studies suggest that the type of strategic environment or expectation feedback may have a large impact on whether the market learns the rational fundamental price. We present an experiment where the fundamental price experiences large unexpected shocks. Markets with negative expectation feedback (strategic substitutes) quickly converge to the new fundamental, while markets with positive expectation feedback (strategic complements) do not converge, but show under-reaction in the short run and over-reaction in the long run. A simple evolutionary selection model of individual learning explains these diﬀerences in aggregate outcomes.
(2012) An experimental study on expectations and learning in overlapping generations models Studies in Nonlinear Dynamics and Econometrics 16, Link to article A plethora of models of learning has been developed and studied in macro-economic models in recent years. In this paper we will try to discriminate between these learning models by running laboratory experiments with paid human subjects. Participants predict inflation rates for 50 successive periods in a standard overlapping generations model and are rewarded on the basis of their forecasting accuracy. The information set for each participant contains
the past inflation rates and the participant’s own past predictions which, in turn, determine the actual inflation rate. We consider two treatments, with a low and a high level of monetary growth, respectively. We find that the level of convergence to the monetary steady state is significantly lower and volatility of inflation rates higher in the second treatment.
Constant gain learning algorithms, such as adaptive expectations with a low
adjustment parameter, seem to provide a better description of the experimental
data than decreasing gain algorithms, such as (ordinary) least squares learning.
Moreover, many participants switch between prediction strategies during the
experiment on the basis of poor performance of their initial prediction strategy.
(2011) Rent-seeking versus productive activities in a multi-task experiment European Economic Review 55, 630-643 PDF-file Link to article Incentive instruments like asset ownership and performance pay often have to strike a balance between the productive incentives and the rent-seeking incentives they provide. Standard theory predicts that these instruments become less attractive when the effectiveness of rent-seeking activities increases. In contrast, theories that emphasize the importance of reciprocity suggest that this relationship may go the other way around. In this paper we test these predictions by means of a laboratory experiment. By and large our findings confirm standard theory. Incentive instruments typically become less attractive when the scope for rent-seeking activities increases. However, reciprocity motivations do seem to mitigate the adverse effects of rent-seeking opportunities to a considerable extent. (2011) How Individuals Choose Health Insurance: An Experimental Analysis European Economic Review 55, 799-819 Link to article An individual choosing a health insurance policy faces a complex decision environment where a large set of alternatives differ on a variety of dimensions. There is uncertainty and the choice is repeated at least once a year. We study decisions and decision strategies in a laboratory experiment where we create a controlled environment that closely mirrors this setting. We use an electronic information board that allows to carefully monitor the individual’s decision strategy. The number of alternatives, switching costs, and the speed at which health deteriorates are varied across treatments. We find that most subjects’ search is based more on attributes than on policies. Moreover, we find that an increase in the number of alternatives increases decision-making time; makes subjects consider a lower fraction of the available information; makes it more likely that subjects will switch; and decreases the quality of their decisions. The introduction of positive costs of switching make people switch less often but improve the quality of their decisions. Finally, if health deteriorates only gradually, individuals tend to stick to their current policy too long. (2011) Incentives versus sorting in tournaments: Evidence from a field experiment Journal of Labour Economics 29, 637-658 Link to article A vast body of empirical studies lends support to the incentive effects of rankorder
tournaments. Evidence comes from experiments in laboratories and
non-experimental studies exploiting sports or firm data. Selection of competitors
across tournaments may bias these non-experimental studies, whereas
short task duration or lack of distracters may limit the external validity of
results obtained in lab experiments or from sports data. To address these
concerns we conducted a field experiment where students selected themselves
into tournaments with different prizes. Within each tournament the best performing
student on the final exam of a standard introductory microeconomics
course could win a substantial financial reward. A standard non-experimental
analysis exploiting across tournament variation in reward size and competitiveness
confirms earlier findings. We find however no evidence for effects
of tournament participation on study effort and exam results when we exploit
our experimental design, indicating that the non-experimental results
are completely due to sorting. Treatment only affects attendance of the first
workgroup meeting following the announcement of treatment status, suggesting
a difference between short-run and long-run decision making. (2011) Cartel Formation and Pricing: The Effect of Managerial Decision Making Rules International Journal of Industrial Organization 29, 126-133 Link to article We experimentally investigate how the managerial decision making process affects choices in a Bertrand pricing game with an opportunity to form non-binding cartels. To do so we compare the effects of three decision-making rules for the firm (decisions by CEOs, majority rule and consensus) to each other and to decisions in a benchmark consisting of single-individual firms. It has been argued elsewhere that groups behave more competitively than individuals. In this setting this predicts that for all three decision-making rules we should observe fewer cartels and lower prices. This is not what we find. For the formation of cartels, there are no differences across treatments. For prices asked, we find that first, cartels lead to higher prices in al treatments, despite the fact that they are non-binding. Second, the decision-making rules strongly affect the prices asked. One thing that stands out is that firms run by CEOs ask higher prices than observed in the other treatments. (2011) The interaction between explicit and relational incentives: An experiment Games and Economic Behavior 73, 573-594 Link to article We consider repeated trust game experiments to study the interplay between explicit and relational incentives. After having gained experience with two payoff variations of the trust game, subjects in the final part explicitly choose which of these two variants to play. Theory predicts that subjects will choose the payoff dominated game (representing a bad explicit contract), because this game better sustains (implicit) relational incentives backed by either reputational or reciprocity considerations. Our main findings are that cooperation is indeed more likely in the payoff dominated game. Moreover, indefinite repetition increases both cooperation rates and the likelihood with which the payoff dominated game is chosen. Overall we conclude that available explicit incentives indeed do affect relational contracting and, anticipating this, agents may choose weak explicit incentives to facilitate implicit agreements.
(2010) Positive expectations feedback experiments and number guessing games as models of financial markets Journal of Economic Psychology 31, 964-984 Link to article (REVISED VERSION WITH EXTRA TREATMENTS) In repeated number guessing games choices typically converge quickly to the Nash equilibrium. In positive expectations feedback experiments, however, convergence to the equilibrium price tends to be very slow, if it occurs at all. Both types of experimental designs have been suggested as modeling essential aspects of financial markets. In order to isolate the source of the differences in outcomes we present several new treatments in this paper. We conclude that the feedback strength (i.e. the ‘p-value’ in standard number guessing games) is essential for the results. Furthermore, positive expectations feedback experiments may provide good representations of highly speculative markets while standard number guessing games model financial markets with more emphasis on dividend yield and value stocks.
(2009) A Truth-Serum for Non-Bayesians: Correcting Proper Scoring Rules for Risk Attitudes Review of Economic Studies 76, 1461-1489 Background material Link to article Proper scoring rules provide convenient and highly efficient tools for incentive compatible elicitations of subjective beliefs. As traditionally used, however, they are valid only under expected value maximization. This paper shows how they can be generalized to modern (“nonexpected utility”) theories of risk and ambiguity, yielding mutual benefits: people using proper scoring rules can benefit from the empirical realism of nonexpected utility, and people analyzing ambiguity attitudes can benefit from the efficient measurements through proper scoring rules. An experiment demonstrates the feasibility of our generalized proper scoring rule. (2009) Price Stability and Volatility in Markets with Positive and Negative Expectations Feedback: An Experimental Investigation Journal of Economic Dynamics and Control 33, 1052-1072 Link to article The evolution of many economic variables is affected by expectations that
economic agents have with respect to the future development of these variables. We show, by
means of laboratory experiments, that market behaviour depends to a large extent on whether
realized market prices respond positively or negatively to average price expectations. In the
case of negative expectations feedback, as in commodity markets, prices converge quickly to
their equilibrium value, confirming the rational expectations hypothesis. In the case of
positive expectations feedback, as is typical for speculative asset markets, large fluctuations in
realized prices and persistent deviations from the benchmark fundamental price are likely. We
estimate individual forecasting rules and investigate how these explain the differences in
aggregate market outcomes.
(2009) The Tragedy of the Commons Revisited: The Importance of Group Decision-Making Journal of Public Economics 93, 785-797 Link to article We use a laboratory experiment to compare the way groups and individuals behave in an inter-temporal common pool dilemma. The experimental design distinguishes between a non-strategic problem where players (individuals or groups of three) make decisions without interaction and a strategic part where players harvest from a common pool. This allows us to correct for differences between individuals and groups in the quality of decisions when testing for differences in competitiveness. Group decisions are either made by majority rule or unanimity. The results show that groups are less myopic than individuals (i.e., they make qualitatively better decisions) but that they are more competitive than individuals when placed in a strategic setting. The net result for groups deciding by majority rule is that they make less efficient decisions in the strategic game than individuals do. We are able to show that this is caused by the median voter departing from her original preference in early periods with a shrinking pool. When groups have to make unanimous decisions they start playing the strategic game more efficiently then individuals do, but they rapidly become more competitive with repetition of the game.
(2008) Expectations and Bubbles in Asset Pricing Experiments Journal of Economic Behavior and Organization 67, 116-133 Link to article We present results on expectation formation in a controlled experimental environment. In each period subjects are asked to predict the next price of a risky asset. The realized market price is derived from an unknown market equilibrium equation with feedback from individual forecasts. In most experiments prices deviate from the benchmark fundamental and bubbles emerge endogenously. These bubbles are inconsistent with rational expectations and seem to be driven by trend chasing behavior or positive feedback expectations. of the participants. We also analyze individual predictions of participants and find that participants within a group tend to coordinate on a common prediction strategy.
(2008) Intrinsic Motivation in a Public Good Environment C.R. Plott and V.L. Smith (eds) The Handbook of Experimental Economics Results Volume 1 Amsterdam: North-Holland
(2008) Explaining the comparative statistics in step-level public good games C.R. Plott and V.L. Smith (eds) The Handbook of Experimental Economics Results volume 1 Amsterdam: North-Holland
(2008) Participation game experiments: Explaining voter turnout C.R. Plott and V.L. Smith (eds) The Handbook of Experimental Economics Results volume 1 Amsterdam: North-Holland
(2007) Gift exchange in a multi-worker firm. Economic Journal 117, 1025-1050 Link to article One of the main findings of a large body of gift exchange experiments is that in an
incomplete contracts environment workers on average do not shirk and usually
provide more than the minimum enforceable effort level. In general, 40 to 60 percent
of the workers reward higher wages with higher effort. These results are observed for
simple one-employer − one-worker relationships. In this paper we investigate whether
they generalize to the more realistic situation in which the employer employs several
workers. We compare a bilateral gift exchange game with a treatment in which each
employer has four workers. We find that effort levels in the latter treatment are only
marginally lower. Gift exchange thus appears to be robust to increases in the size of
the workforce. (2007) Who should invest in firm specific training? Journal of Population Economics 20, 329-357 Link to article We study experimentally whether employers or workers should in- vest in firm specific training. Workers have an alternative trading opportunity that either takes the form of an outside option or of a threat point. Theory predicts that with outside options employers have (weakly) better investment incentives than workers and should therefore be the investing party. With threat points employers and workers are predicted to invest the same. Our results are by and large in line with these predictions. Due to offsetting inefficiencies in the bargaining stage, however, realized inefficiencies are remarkably similar across the different situations considered. (2007) Does making specific investments unobservable boost investment incentives? Journal of Economics and Management Strategy 16, 911-942 PDF-file webappendix, extended equilibrium analyses Standard theory predicts that holdup can be alleviated by making specific investments unobservable; private information creates an informational rent that boosts investment incentives. Empirical findings, however, indicate that holdup is attenuated by fairness and reciprocity motivations. Private information may interfere with these, as it becomes impossible to observe whether the investor behaved fair or not. In that way unobservability could crowd out an informal fairness/reciprocity mechanism in place. This paper reports on an experiment to investigate this issue empirically. Our results are in line with standard predictions when there is limited scope for social preferences. But with sufficient scope for these motivational factors, unobservability does not boost specific investments. (2007) Learning in Cobweb Experiments Macroeconomic Dynamics 11, 8-33 Link to article Different theories of expectation formation and learning usually yield different outcomes for realized market prices in dynamic models. The purpose of this paper is to investigate expectation formation and learning in a controlled experimental environment. Subjects are asked to predict next periods aggregate price in a dynamic commodity market model with feedback from individual expectations. Subjects have no information about underlying market equilibrium equations, but can learn by observing past price realizations and predictions. We conduct both a stable, an unstable and a strongly unstable treat-ment. In the stable treatment rational expectations (RE) yields a good description of observed aggregate price fluctuations: prices remain close to the RE steady state. In the unstable treatments prices exhibit large fluctuations around the RE steady state. Although the sample mean of realized prices is close to the RE steady state, the amplitude of the price fluctuations as measured by the variance is significantly larger than the amplitude under RE, implying persistent excess volatility. However, agents? forecasts are boundedly rational in the sense that fluctuations in aggregate prices are unpredictable and exhibit no forecastable structure that could easily be exploited. (2007) Promotion rules and skill acquisition: An experimental study. Economica 74, 259-297 Link to article Gibbons (1998) identifies a tradeoff between up-or-stay and up-or-out promotion rules. Up-or- stay never wastes skills of those not promoted but may provide insufficient incentives to invest in skills. Up-or-out on the other hand can always induce investment in skill acquisition but may waste the skills of those not promoted. This paper reports an experiment designed to study this tradeoff. Under the up-or-out rule parties behave (almost) just as theory predicts them to do. But under up-or-stay (and stay-or-stay) rules results differ markedly from theoretical predictions. Workers invest rather frequently although the subgame perfect prediction is that they should not do so. Deviations from theoretical predictions can be explained by reference to different reciprocity mechanisms. (2007) Underinvestment in training? Joop Hartog and Henriette Maassen van den Brink (eds) Human Capital; Advances in Theory and Evidence Cambridge University Press PDF-file (2007) On the Importance of Default Breach Remedies Journal of Institutional and Theoretical Economics 163, 5-22 webappendix, instructions, extended equilibrium analyses Link to article Economic theory predicts that default breach remedies are immaterial whenever contracting and bargaining cost sare negligible. Parties will then always incorporate the efficient remedy in to their contract. Some experimental studies, however, suggest that in practice default rules do matter, because they may affect parties’ preferences over the various breach remedies. This paper presents results from an experiment designed to address the (un)importance of default breach remedies for actual contract outcomes. In contrast to previous studies the focus is on a setting with both explicit interaction between contracting parties and explicit monetary incentives. We find that default rules do have an impact on actual contract choices. The reason for this is
not that proposals and/or responses are biased towards the default contract, but rather that parties often disagree over what the best contract is and therefore end up with the default. (2007) Distant relations, a review of "Social Psychology and Economics" Social Justice Research 20, 388-399 Link to article An essay on the relation between (social) psychology and (experimental) economics and a review of the recent book "Social Psychology and Economics".
(2006) On the dynamics of social ties structures in groups (An earlier version of this paper was titled: Group formation in a public good experiment) Journal of Economic Psychology 27, 187-204 Link to article Economic behavior often takes place in small groups of people interacting with each other (like work teams and boards of directors, but also social networks and neighborhoods). Characteristic of such interaction is the development of (affective) interpersonal relationships, or social ties. The embeddedness of economic behavior in networks of social ties seems to have a profound impact on the outcome of economic processes. In this paper we investigate experimentally the development of social ties structures through economic interaction in a public good environment. It turns out that complicated dynamics arise from individual differences in social value orientation and affective response patterns. (2006) Price clustering and natural resistance points in the Dutch stock market: a natural experiment European Economic Review 50, 1937-1950 Appendix Link to article This paper focuses on the tendency of stock prices to cluster at round numbers (like 10, 20, 30 etc and to a lesser extend 5, 15, 25, etc) and the related effect of round number price barriers (prices pass less frequently round numbers than other numbers). These effects are against any strict definition of the efficient market theory. Two competing hypotheses are tested, using data from the Dutch stock market during 1990-2001. After January 1, 1999 stock prices were listed in euros, while guilders were still the currency of daily life until 2002. According to the aspiration level hypothesis investors will have target prices for the stocks they own. This hypothesis predicts that round number effects in guilders will only slowly disappear. The odd price hypothesis originates from cognitive psychology and marketing. Humans have to tendency to compare numbers digit by digit from left to right, and therefore consider an odd price of 19.90 as considerable less than 20.00. This hypothesis predicts an abrupt change in round number effects after January 1, 1999. The results reject the aspiration level hypothesis and support the odd price hypothesis. (2006) Breach remedies, reliance and renegotiation. International Review of Law and Economics 26, 263-296 Link to article Breach remedies can be used to protect specific investments and are therefore a remedy against holdup. Yet some commonly used remedies are predicted to provide too much protection, thereby inducing overinvestment. Two motives drive this prediction: the insurance motive and the separation prevention motive. This paper presents results from an experiment designed to test whether these two motives show up in practice. In contrast to previous experiments the focus is on a setting where ex post renegotiations are possible. Our results indicate that also in this case the insurance motive and the separation prevention motive are at work, as predicted. A second main finding is that there is much less need for sophisticated breach remedies based on compensatory money damages than is suggested by theory.
(2005) A strategy experiment in dynamic asset pricing. Journal of Economic Dynamics and Control 29, 823-843 Link to article This study presents a strategy experiment is asset pricing. In a simple dynamic asset pricing model the price in the present period is determined by the expectations of next period's price. After participating in an introductory laboratory experiment on expectation formation participants formulate a complete forecasting strategy. These strategies are programmed and markets are simulated. Participants receive feedback from the results of these simulations and can adapt their strategy. Four rounds are played. A final laboratory experiment compares predictions of participants with the predictions of the submitted strategy. We find that most of the participants submit complicated strategies and that strategies become more complicated over the rounds. Most markets converge to a steady state price only after many periods, if at all. The number of converging price sequences increases over the rounds. These results suggest in general slow convergence and learning of the subjects over the rounds. Even in a stationary environment it turns out to be difficult to learn the correct fundamental price level. An important part of the non-convergence seems to be caused not by individual strategies but by the interaction of several strategies together. From the final experiment we conclude that the strategies are a good representation of what participants do in a laboratory experiment. (2005) Coordination of Expectations in Asset Pricing Experiments Review of Financial Studies 18, 955-980 Appendix Link to article We investigate expectation formation in a controlled experimental environment. Subjects are asked to predict the price in a standard asset pricing model. They do not have knowledge of the underlying market equilibrium equations, but they know all past realized prices and their own predictions. Aggregate demand of the risky asset depends upon the forecasts of the participants. The realized price is then obtained from market equilibrium with feedback from individual expectations. Each market is populated by six subjects and a small fraction of fundamentalist traders. Realized prices differ significantly from fundamental values. In some groups the asset price converges slowly to the fundamental price, in other groups there are regular oscillations around the fundamental price. In all groups participants coordinate on a common prediction strategy. The individual prediction strategies can be estimated and correspond, for a large majority of participants, to simple linear autoregressive forecasting rules.
(2004) The Instability of a Heterogeneous Cobweb Economy:a Strategy Experiment on Expectation Formation Jounal of Economic Behavior and Organization 54, 453-481 Link to article Which strategies do agents use when forming expectations about future prices, and how often do combinations of these strategies lead to stable or unstable outcomes? To answer these questions we performed a four-round strategy experiment in a 20 period cobweb economy with expectations feedback. Subjects did not know the underlying market equilibrium equations, but only observed past prices. All strategies were programmed and after each round the subjects received feedback about the relative performance of their strategy, and were allowed to revise their strategy for the next round. Over the rounds quadratic forecasting errors decrease and realized market prices move to a neighborhood of the rational expectations (RE) steady state, but at the same time the complexity of the price fluctuations increases. Convergence to the unique RE steady state occurs in less than 10% of all cases. In the final round 60% of the price fluctuations appears to be chaotic. Strategy simulations with homogeneous agents typically show regular behavior, with prices converging to a steady state or to a 'far from the steady state' stable cycle. Heterogeneous interaction of simple prediction strategies thus seems to be the main source of the endogenous price fluctuations, frequently leading to a boundedly rational equilibrium of 'close to the steady state chaos'.
(2004) Do Democracies breed Chickens? R. Suleiman, D. Budescu, I. Fischer and D. Messick (eds) Contemporary Psychological Research on Social Dilemmas Cambridge University Press
Our interest is in assessing the effect of different group decision-rules (or ?regimes?) on conflict resolution. Toward this goal, we model intergroup conflict as a two-stage Chicken game between two groups (teams) of players and distinguish two decision-making procedures for determining a team's choice: democracy (majority rule) and dictatorship (one individual makes the team's decision). In an experiment with three individuals per team, we found that (i) decision-making procedures had no effect on choices at the team level; (ii) decision-making procedures did not affect first-stage choices by individuals; (iii) in the second stage, individuals in democracies were more likely to concede than dictators; (iv) dictators facing a democratic team were least likely to concede, whereas individuals in a democratic team facing a dictator were most likely to concede.
(2004) Specific investments, holdup, and the outside option principle. European Economic Review 48, 1399-1410 Link to article According to the outside option principle the holdup problem can be solved when the non-investor has a binding outside option. The investor then becomes residual claimant, creating efficient investment incentives. This paper reports about an experiment designed to test this. We find that when the outside option is binding investment levels fall short of the efficient level, but holdup is less of a problem than predicted when the outside option is non-binding. (2004) What's Causing Overreaction? An Experimental Investigation of Recency and the Hot Hand Effect Scandinavian Journal of Economics 106, 533-553 Link to article A substantial body of empirical literature provides evidence for overreaction in markets. Past losers outperform past winners in stock markets as well as in sports markets. Two hypotheses are consistent with this observation. The recency hypothesis states that traders overweight recent information. Thus, they are too optimistic about winners and too pessimistic about losers. According to the hot hand hypothesis, traders try to discover trends in the past record of a firm or a team, and thereby overestimate the autocorrelation in the series. An experimental design allows us to distinguish between these hypotheses. The evidence is consistent with the hot hand hypothesis. Experience slightly reduces the observed phenomenon of overreaction.
(2003) The Need for Marriage Contracts: An Experimental Study. Journal of Population Economics 16, 431-53 Link to article A spouse who invests in relationship specific human capital enlarges the size of a couple s total surplus. Such investments typically also weaken the outside opportunities of the specializing spouse and thereby her bargaining position. Realizing this, underinvestment in relationship specific human capital may result. This reduces the couple s potential surplus. Private or public marriage contracts can stipulate conditions to solve this holdup underinvestment problem. This paper reports about an experiment that addresses the practical relevance of this problem. We find that although underinvestment in home production occurs, it is less frequent than game theory predicts. That is: players are prepared to specialize in home production when backwards induction predicts them not to do so. Furthermore, we find that the non-investing spouses are less opportunistic towards their partners when the large surplus has been created by the spouse than when the size of the surplus is determined exogenously.
(2003) An experimental comparison of reliance levels under alternative breach remedies. Rand Journal of Economics 34, 205-222
Breach remedies serve an important role in protecting relationship-specific investments. Theory predicts that some common remedies protect too well and induce overinvestment because of complete insurance against potential separation, and the possibility to prevent breach by increasing the damage payment due through the investment made. In this paper we report on an experiment designed to address whether these two motives show up in practice. In line with theoretical predictions we find that overinvestment does not occur under liquidated damages. In case of expectation damages the full insurance motive indeed appears to be operative. In case of reliance damages both motives are at work, as is predicted.
(2002) Imitation and Belief Learning in an Oligopoly Experiment. Review of Economic Studies 69, 973-97
We examine the force of three types of behavioural dynamics in quantity-setting triopoly experiments: (1) mimicking the successful firm, (2) rules based on following the exemplary firm, and (3) rules based on belief learning. Theoretically, these three types of rules lead to the competitive, the collusive, and the Cournot-Nash outcome, respectively. In the experiment we employ three information treatments, each of which is hypothesized to be conducive to the force of one of the three dynamic rules. To a large extent, the results are consistent with the hypothesized relationships between treatments, behavioural rules, and outcomes.
(2002) Social Ties in a Public Good Experiment. Journal of Public Economics 85, 275-99 Link to article The formation of social ties is examined in an experimental study of voluntary public good provision. The experiment consists of three parts. In the first part the value orientation (attitude to a generalized other) is measured. In the second part couples play 25 periods of a public good game. In the third part the attitudes of subjects to their partners in the public good game is measured. The concept of a social tie is operationalized as the difference between the measurements in the first and third parts. Evidence for the occurrence of social ties is found. These ties depend on the success of the interaction in the public good game.
(2001) Expectation Formation in Step-Level Public Good Games. Economic Inquiry 39, 250-69 Link to article This article focuses on the process of expectation formation. Specifically, the question is addressed whether individuals think strategically when they form beliefs about other players behavior. Most belief learning models assume that people abstract from strategic considerations. Using an incentive-compatible mechanism, experimental data are obtained on subjects expectations in a step-level public good game and in a game against nature. Beliefs in the interactive games develop in the same way as in the game against nature, providing evidence that strategic considerations do not play a role. The evidence is consistent with predictions derived from the naive Bayesian model. (2001) On the Relation between Asset Ownership and Specific Investments. Economic Journal 111, 791-820 Link to article Experimental results are presented for a simplified version of Hart s(1995) theory of the firm. Theory predicts that investment levels remain constant when investors no-trade pay-offs increase, if these pay-offs are threat points. While they may decrease when no-trade pay-offs are outside options. Our results support these predictions in a relative sense. Average investment levels exceed the predicted level. Actual investment behaviour is consistent with the outcomes of the bargaining stage. The play of the game is supported by a reciprocity mechanism in which non-investors consider higher investment levels as fair behaviour which deserves a reward. Investors anticipate this. (2001) Incentive Systems in a Real Effort Experiment. European Economic Review 45, 187-214 Link to article In the reported experiment different payment schemes are examined on their incentive effects. Payments based on individual, team and relative performance are compared. Subjects conducted computerized tasks that required substantial effort. The results show that individual and team payment induced the same effort levels. In team production free-riding occurred, but it was compensated by many subjects providing more effort than in case of individual pay. Effort was higher, but more variable in tournaments, while in case of varying abilities workers with relatively low ability worked very hard and drove up effort of the others. Finally, attitudes towards work and other workers differed strongly between conditions.
(2000) Decisions and Strategies in a Sequential Search Experiment. Journal of Economic Psychology 21, 91-102 Link to article The strategy method is becoming an important tool in experimental methodology. This study examines how well this method works in an individual decision experiment. Subjects are faced with a sequential search problem. After extensive practice in solving the problem and formulating strategies, they play 20 periods for money. In each period the subjects first make decisions by hand, after that their strategy operates on the same sequence of bids. In each period, only one of the results is paid out (randomly determined). After each period, subjects can change their strategy. This method makes a direct comparison between strategies and decisions possible. (2000) Expectation Formation in a Cobweb Economy; some one-person experiments. D.Delli Gatti, M. Gallegati and A. Kirman (eds) Market Structure, Aggregation and Heterogeneity Springer Verlag PDF-file In economics expectations play an important role. In making decisions agents form expectations about future values of variables. Therefore, in any dynamic economic model, agents beliefs about the future have to be modeled. Do people form expectations using a simple rule of thumb or do they use a continually updated forecasting rule? Can people learn a rational expectations equilibrium ? This paper describes experiments where we investigate how people form expectations in the simplest dynamic economic model, the cobweb model, without any knowledge of the underlying market equilibrium equations. We found that only about 35% of the subjects seemed to be able to learn the unique rational expectations equilibrium. We also found that many individuals deviate from rational expectations for long periods of time, sometimes with 'systematic forecasting errors'. (2000) The influence of banking and borrowing under different penalty regimes in tradable green certificate markets - resulst from an experimental laboratory experimen Energy & Environment 11, 407-422 Link to article
(1999) Strategic Behavior in Public Good Games: When Partners Drift Apart. Economics Letters 62, 35-41 Expanded working paper Link to article (Abstract of the expanded Working Paper) We use a new design to (re)examine the occurrence of strategic behavior in voluntary contributions mechanism experiments. Subjects are in groups that remain constant for a number of periods before they change. The change is public knowledge and always consists of one member switching to another group. Moreover, everyone knows that this individual will not be grouped with any of the members again. In this sense 'partners' really become 'strangers'. We find considerable evidence of strategic behavior in these relatively simple games. Subjects who leave their group contribute less than in the previous period and less than in the next period in their new group. Contribution levels decline with the number of periods remaining for the group. The results can be explained by the occurrence of conditional cooperators, who are willing to contribute if and only if enough others do the same. The presence of these subjects elicits strategic (forward looking) behavior from others.
(1998) Learning by Experience and Learning by Imitating Successful Others. Journal of Economic Behavior and Organization 34, 559-75 Link to article It is examined whether individuals learn from experience and/or by imitation. Usually individual judgmental learning displays systematic biases against the ideal Bayesian model. Imitation of successful others may decrease such effects. In an experiment, subjects make investment decisions and report expectations. The profitability of an investment depends on the realization of a stationary distribution of states of the world. In the baseline, subjects do not receive information about others expectations; in the other conditions, subjects perceive the expectations of others who observed either exactly the same events or different events from the same distribution. The results indicate that people learn both from experience and by imitating successful others. (1998) Quantal Response Models in Step-Level Public Good Games. European Journal of Political Economy 14, 89-100 Link to article The effect of adding noise to both an equilibrium model and a naive Bayesian model of behavior in step-level public good games is studied. Quantal response equilibria are derived for these games and a naive Bayesian quantal response function is presented. The models are fit for experimental data from such a game and compared. The results seem more promising for the naive Bayesian model than for the equilibrium model. (1998) Strategies of Search. Journal of Economic Behavior and Organization 35, 309-32 Link to article Two experiments are designed to examine the strategies people use in search behavior. In the first experiment, an electronic information board is used to register on which aspects of the situation subjects focus their attention and after that subjects also submit a formal strategy. Although efficiency is rather high, most subjects do not use the theoretical optimal strategy. Many subjects seem to focus on the total earnings instead of the marginal return of another draw. On an average, subjects stop searching too early. This cannot totally be explained by risk aversion. The second experiment shows that the tendency to search too little can be(partly) explained by learning processes. (1998) Public Good Provision and Public Bad Prevention: The Effect of Framing. Journal of Economic Behavior and Organization 34, 143-61 Link to article An experimental analysis of voluntary, binary contributions for step-level public goods/bads is presented. Alternatively, the situation is presented as the provision of a public good or the prevention of a public bad. From a strategic point of view, these presentations are equivalent. In early periods of the twenty round experiments, behavior is indeed observed to be similar in both cases but, after about five periods, differences start to occur that grow larger. A simple learning model is developed that replicates the patterns in the experiments. Extrapolation beyond twenty periods show that the pattern observed reflects an equilibrium selection. (1998) Quantifying the effects of sow-herd management information systems on farmers' decision making using experimental economics American Journal of Agricultural Economy 80, 821-829 Link to article A pilot experiment was conducted to yield insight into whether laboratory experiments can be used as an alternative to surveys for determining the profitability of management information systems (MIS) in sow farming. In total, eighty-six sow farmers, including fifty-one farmers from an earlier survey study, participated in an individual decision experiment, which was executed in a quasi-experimental, nonequivalent control, pretest/posttest design. In a MIS group, MIS estimates were derived by within-subjects comparisons of decision quality with and without MIS features. A baseline group was included to control for learning or exhaustion effects during an experimental session. Subjects receiving MIS features significantly improved their decision making whereas subjects without MIS features did not. Correlation between MIS estimates of the survey study and MIS estimates of the experiments was not significant.
(1996) Value Orientations, Expectations and Voluntary Contributions in Public Goods. Economic Journal 106, 817-45 Link to article An experimental analysis of voluntary, binary contributions for step-level public goods is presented. Independent information is obtained on individual value orientation and expectations about the behavior of other subjects using incentive compatible mechanisms. The effects of increasing payoffs for the public good and of decreasing groupsize are investigated. Attention is focused on the determination of expectations, the use of expectations when deciding on behavior, and differences in expectations and behavior between individuals with different value orientations. (1996) Voter Turnout as a Participation Game: An Experimental Investigation. International Journal of Game Theory 25, 385-406 PDF-file This paper reports the results of a series of experiments in which participation games are analyzed. Voter turnout is an example of an application of this game. Hypotheses derived from a game theoretic analysis are systematically elaborated, analyzed, and tested. The results are used to explore future paths of research. A distinction is made in two parameter configurations (representing winner-takes-all elections and elections with proportional representation).
(1996) Why People Vote: Experimental Evidence. Journal of Economic Psychology 17, 417-42 Link to article This paper reports the results of a series of experiments in which the voter turnout decision was analyzed as a participation game. The experiments were inspired by the model of Schram and Van Winden(1991). In the model, individuals favoring the same policy or candidate are members of a common reference group, and the vote decision is determined by inter- and intragroup relations. Our experimental data supported three hypotheses derived from this model. First, participation increased with group identity. Second, communication enhanced participation. Finally, participation was strongly related to individual characteristics. A simple analysis of the way people learn from their experiences in previous periods is used to argue that any model of voter turnout should take account of myopic adaptive behavior and inertia.
(1995) The Determinants Of Subjective Emotional Intensity. Cognition Emotion 9, 483-506 PDF-file Tested the hypothesis that emotional intensity is determined jointly by variables from the following 4 classes: concerns (strength and relevance), appraisal, regulation, and individual response propensities. For 6 wks, 37 college students reported an emotion every week and answered questions on a computer. All 4 classes were correlated with emotional intensity, and the concern variables showed the highest correlations. The importance of the determinants was not always the same. There were differences between the emotions and between the dimensions of emotional intensity. The relation between regulation and emotional intensity is a complex and reciprocal one. Emotional intensity presumably determines how much regulation is needed, but successful regulation will decrease that intensity.
(1994) The Structure Of Subjective Emotional Intensity. Cognition & Emotion 8, 329-350 PDF-file Examined whether the subjective intensity of emotion is one dimensional, and, if not, what are its dimensions? 222 instances of emotions were studied and for each instance 37 Ss completed a questionnaire. Ss also drew a diagram of the course of their emotion over time. A factor analysis of the intensity questions and the diagram variables yielded 6 factors: (1) duration of the emotion and delay of its onset and peak; (2) perceived bodily changes and strength of felt passivity; (3) recollection and re-experience of the emotion; (4) strength and drasticness of action tendency, and drasticness of actual behavior; (5) belief changes and influence upon long-term behavior; and (6) overall felt intensity. Most specific dimensions correlated moderately with overall felt intensity.
(1992) The complexity of intensity. Issues concerning the structure of emotion intensity. Margaret S. Clark (eds) Emotion, Review of Personality and Social Psychology vol. 13. Newbury Park London New Delhi: SAGE Publications PDF-file (from the editor's introduction) One chapter takes on a surprisingly neglected topic in the field - that of the nature of emotional intensity. In this chapter, Frijda and his collegues discuss various ways of thinking about emotional intensity (e.g., duration, peak intensity, onset latency). Then they present some preliminairy data relevant to the questions of how these dimensions interrelate and whether qualitatively distinct emotions are also quantitatively distinct.
(1991) The duration of affective phenomena or: emotions, sentiments and passions K.T. Strongman (eds) International Review of Studies on Emotion 1 Chichester: John Wiley and Sons PDF-file
(1991) The Structure and Determinants of Emotional Intensity
(1990) Simulation-Models Describing the Dutch Unemployement Insurance J.K. Brunner & H-G Petersen (eds) Simulation Models in Tax and Transfer Policy Campus Verlag Frankfurt/Main, New York PDF-file