The Why Axis
Bosch-Domènech, A., Montalvo, J. G., Nagel, R. & Satorra, A. (2002). One, two, (three),
infinity, ...: Newspaper and lab beauty-contest experiments. American Economic Review 92,
1687-1701.
Experiment in magazine/newspaper vs. in a lab. Magazine: more participants, higher rewards,
more time, more diverse subject pool. They ask for a written explanation of the participants’
choices to analyse the reasoning process (unusual). Basic beauty-contest game: each player
chooses a decimal number (0,100), the winner is the person whose number is closest to p
times the mean of all chosen numbers. Nash equilibrium is zero.
Assumption of parallelism between lab and field: experimental results are influenced by the
different costs of thinking, calculating, deciding, and acting. Large-scale newspaper
experiments, all 3 yield similar results -> parallelism assumption has been upheld.
The iterated best reply (degenerate) is prevalent.
Newspaper experiments can be done and are fruitful.
Levitt, S. D., J.A. List, & E. Sally (2011). Checkmate: Exploring backward induction among
chess players. American Economic Review 101, 975-990.
Most laboratory experiments have found that agents are not able to successfully backward
induct. Much of this evidence, however, is generated using the Centipede game, which is ill-
suited for testing this theory. This study analyses the play of world class chess players both in
the centipede game and in Race to 100 games (pure tests of backward induction). The chess
players virtually never play the backward induction equilibrium in the centipede game, while
in the race to 100 game (winner-take-all), they properly backward induct.
Centipede game is a 2 player, finite-move game in which the subjects alternate choosing
whether to end the game or to pass to the other player. The payoff to ending the game at a
particular node is greater than the payoff if the other player ends the game at the next rode,
but less than the payoff earned if the other player elects not to end the game. Equilibrium:
game is stopped at first node. Many reasons not to, like your belief of the rationality of your
opponent. Only 4% ended the game at the first node, even though other research on chess
players reached 69%. High degree of cooperation, maximizes wealth. Cooperative
arrangements are common in tournament chess
Race to 100 is a 2-player game, alternate choosing numbers within a given range (1-10 or 1-
9), are added in sequence until one player chooses a number that makes the sum 100. Strategy
does NOT depend on beliefs about other players or distributional preferences. Results suggest
that failure to sto at the first node in centipede has little to do with an inability to reason
backwards; 60% achieve Nash solution. These participants did not do better than the other
participants in the centipede game. The difference between 1-10 and 1-9 influence play
considerably.
Gneezy, U. & Rustichini, A. (2000). Pay enough or don't pay at all. Quarterly Journal of
Economics 115, 791-810.
Economist assume that monetary incentives improve performance, and psychologists claim
that the opposite may happen. The effect of monetary compensation on performance was not
, monotonic. In treatments in which money was offered, a larger amount yielded a higher
performance. Offering money did not always produce an improvement; subjects who were
offered monetary incentives performed more poorly than those who were offered no
compensation.
Controlled laboratory environment which pays particular attention to the comparison between
total absence and presence of monetary rewards. Factors different from money and effort
enter into the decision of the agent: social norms, reciprocity. Inadequate explanations for the
results. Reward may replace intrinsic motivation, net effect may be reduction in overall
motivation. Negative effect is significant only if the reward is contingent on performance;
subjects who are paid a fixes positive amount do not display reduction in intrinsic motivation.
Explanation is based on cognitive arguments: contracts, social or private, are usually
incomplete, and regulate an interaction in a situation of incomplete information. The
introduction of a reward modifies some of the terms of the contract, but also provides
information. The new behavior produced by the contract is a response to the combination of a
new payoff structure and the new information.
Ariely, D., Gneezy, U., Loewenstein, G. & Mazar, N. (2009). Large stakes and big mistakes.
The Review of Economic Studies 76, 451-469.
Paying based on performance is widely perceived as motivating effort and enhancing
productivity. however, psychological research suggests that excessive rewards can in some
cases produce supra-optimal motivation, resulting in a decline in performance. Experiments at
MIT and rural India, where subjects worked on different tasks and received performance-
contingent payments that varied from small to large relative to their typical levels of pay,
showed that high reward levels can have detrimental effects on performance. The assumption
that increasing performance-contingent incentives will increase motivation and effort is
generally accepted, although it might be questioned. But this paper focuses on whether an
increase in motivation and effort will result in improved performance. In 8/9 tasks, higher
incentives led to worse performance. Do administrators who are in charge of setting
compensation just assume that incentives enhance performance, or do they have other reasons
for the high compensation than the desire to elicit maximum levels of performance? Workers
who are not actually facing high incentives might be motivated by the prospect of doing so.
Bolton, G. E., Ockenfels, A. & Thonemann, U. W. (2012). Managers and students as
newsvendors. Management Science 58(12), 2225-2233.
Compare how experienced managers and students solve the newsvendor problem. Managers
broadly exhibit the same kind of pull-to-center bias as students do. They use information and
task training no better than students (but all participants used it to improve their decision
making). Their performance is positively affected by the level of their education and their
level in the organizational hierarchy.
Newsvendor problem is a foundational model for the study of inventory control and supply
chain management. Applies to products with short selling seasons relative to production and
distribution time. Decide how much of the product to stock in inventory prior to seeing the
actual demand.
Bosch-Domènech, A., Montalvo, J. G., Nagel, R. & Satorra, A. (2002). One, two, (three),
infinity, ...: Newspaper and lab beauty-contest experiments. American Economic Review 92,
1687-1701.
Experiment in magazine/newspaper vs. in a lab. Magazine: more participants, higher rewards,
more time, more diverse subject pool. They ask for a written explanation of the participants’
choices to analyse the reasoning process (unusual). Basic beauty-contest game: each player
chooses a decimal number (0,100), the winner is the person whose number is closest to p
times the mean of all chosen numbers. Nash equilibrium is zero.
Assumption of parallelism between lab and field: experimental results are influenced by the
different costs of thinking, calculating, deciding, and acting. Large-scale newspaper
experiments, all 3 yield similar results -> parallelism assumption has been upheld.
The iterated best reply (degenerate) is prevalent.
Newspaper experiments can be done and are fruitful.
Levitt, S. D., J.A. List, & E. Sally (2011). Checkmate: Exploring backward induction among
chess players. American Economic Review 101, 975-990.
Most laboratory experiments have found that agents are not able to successfully backward
induct. Much of this evidence, however, is generated using the Centipede game, which is ill-
suited for testing this theory. This study analyses the play of world class chess players both in
the centipede game and in Race to 100 games (pure tests of backward induction). The chess
players virtually never play the backward induction equilibrium in the centipede game, while
in the race to 100 game (winner-take-all), they properly backward induct.
Centipede game is a 2 player, finite-move game in which the subjects alternate choosing
whether to end the game or to pass to the other player. The payoff to ending the game at a
particular node is greater than the payoff if the other player ends the game at the next rode,
but less than the payoff earned if the other player elects not to end the game. Equilibrium:
game is stopped at first node. Many reasons not to, like your belief of the rationality of your
opponent. Only 4% ended the game at the first node, even though other research on chess
players reached 69%. High degree of cooperation, maximizes wealth. Cooperative
arrangements are common in tournament chess
Race to 100 is a 2-player game, alternate choosing numbers within a given range (1-10 or 1-
9), are added in sequence until one player chooses a number that makes the sum 100. Strategy
does NOT depend on beliefs about other players or distributional preferences. Results suggest
that failure to sto at the first node in centipede has little to do with an inability to reason
backwards; 60% achieve Nash solution. These participants did not do better than the other
participants in the centipede game. The difference between 1-10 and 1-9 influence play
considerably.
Gneezy, U. & Rustichini, A. (2000). Pay enough or don't pay at all. Quarterly Journal of
Economics 115, 791-810.
Economist assume that monetary incentives improve performance, and psychologists claim
that the opposite may happen. The effect of monetary compensation on performance was not
, monotonic. In treatments in which money was offered, a larger amount yielded a higher
performance. Offering money did not always produce an improvement; subjects who were
offered monetary incentives performed more poorly than those who were offered no
compensation.
Controlled laboratory environment which pays particular attention to the comparison between
total absence and presence of monetary rewards. Factors different from money and effort
enter into the decision of the agent: social norms, reciprocity. Inadequate explanations for the
results. Reward may replace intrinsic motivation, net effect may be reduction in overall
motivation. Negative effect is significant only if the reward is contingent on performance;
subjects who are paid a fixes positive amount do not display reduction in intrinsic motivation.
Explanation is based on cognitive arguments: contracts, social or private, are usually
incomplete, and regulate an interaction in a situation of incomplete information. The
introduction of a reward modifies some of the terms of the contract, but also provides
information. The new behavior produced by the contract is a response to the combination of a
new payoff structure and the new information.
Ariely, D., Gneezy, U., Loewenstein, G. & Mazar, N. (2009). Large stakes and big mistakes.
The Review of Economic Studies 76, 451-469.
Paying based on performance is widely perceived as motivating effort and enhancing
productivity. however, psychological research suggests that excessive rewards can in some
cases produce supra-optimal motivation, resulting in a decline in performance. Experiments at
MIT and rural India, where subjects worked on different tasks and received performance-
contingent payments that varied from small to large relative to their typical levels of pay,
showed that high reward levels can have detrimental effects on performance. The assumption
that increasing performance-contingent incentives will increase motivation and effort is
generally accepted, although it might be questioned. But this paper focuses on whether an
increase in motivation and effort will result in improved performance. In 8/9 tasks, higher
incentives led to worse performance. Do administrators who are in charge of setting
compensation just assume that incentives enhance performance, or do they have other reasons
for the high compensation than the desire to elicit maximum levels of performance? Workers
who are not actually facing high incentives might be motivated by the prospect of doing so.
Bolton, G. E., Ockenfels, A. & Thonemann, U. W. (2012). Managers and students as
newsvendors. Management Science 58(12), 2225-2233.
Compare how experienced managers and students solve the newsvendor problem. Managers
broadly exhibit the same kind of pull-to-center bias as students do. They use information and
task training no better than students (but all participants used it to improve their decision
making). Their performance is positively affected by the level of their education and their
level in the organizational hierarchy.
Newsvendor problem is a foundational model for the study of inventory control and supply
chain management. Applies to products with short selling seasons relative to production and
distribution time. Decide how much of the product to stock in inventory prior to seeing the
actual demand.
