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Economic Category: Information and Uncertainty

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Information and Uncertainty - Article

1. Alternative Expected Utility

This article covers Weighted Expected Utility, Non-Linear Expected Utility, and Preference Reversals and Regret Theory. [Details...]

2. Asset Structures and Spanning

One of the crucial requirements for the equivalence of Radner equilibrium and Arrow-Debreu equilibrium is that the asset structure of an economy spans the set of states. By "spanning" we mean that a combination of assets can be used to transfer any amount of purchasing power from one state to another. [Details...]

3. Information

In the past two decades, an important strand of economic research, sometimes referred to as information economics, has explored the extent to which markets and other institutions process and convey information. [Details...]

4. Insurance

Insurance plays a central role in the functioning of modern economies. The traditional role of insurance remains the essential one recognized in ancient civilizations, that of spreading risk among similarly situated individuals. [Details...]

5. Radner Equilibrium

The Radner equilibrium considers a situation where there are multiple assets, multiple goods, multiple time periods and multiple states (thus uncertainty). [Details...]

6. Revisiting Teaching Moral Hazard: Additional Class-Room Experimental Results

The authors previously presented results of their attempt to make moral hazard more real to beginning economics students by inducing their own demonstration of it through their behavior regarding exams. Though earlier results provided no basis to support a hypothesis of moral hazard in the exam behavior experiment, the procedure's pedagogical usefulness was noted. This paper presents the results of the authors' attempt to correct their perceived experimental design flaws and induce moral hazard with a new sample of beginning economics students. These results are analyzed, and conclusions are described in this paper. [Details...]

7. Take This Simple Test ... And find out how rational you are.

A humorous discussion of the Allais Paradox. [Details...]

8. The Equivalence Theorem - Arrow-Debreu and Radner

This article proves that the allocations in a Radner equilibrium would be equivalent to the allocations in an Arrow-Debreu equilibrium. [Details...]

Information and Uncertainty - Interactive Tutorial

9. Completing Markets: Options and Long-Lived Securities

Options are one of the more interesting securities to which arbitrage reasoning can be applied. (European) options, recall, are assets who derive their value from an underlying security, thus they have a return structure ro = [max(0, r1 - c), max(0, r2 - c), .., max(0, rS-c)] where r1, r2, .., rS are the returns on the underlying security and c is the "strike" price. The strike price is the asset price at which the owner of the option is entitled to buy (if a call option) or sell (if a put option) a unit of an underlying security if he decides to "exercise" it. One of the more interesting results, as stressed by Stephen Ross (1976), is that we can use options to "complete" incomplete markets: specifically, we can construct options to span a space when there are an insufficient number of fundamental assets. [Details...]

10. Risk

Ineractive tutorial on the concept of risk [Details...]

11. Risk Aversion

The interactive tutorial on risk calculated the expected values of some games and securities. It made a connection between the expected value of a security and its market price. This use of the expected value is based on the Law of Large Numbers, which is a statement about what happens when a game is repeated over and over and over again. If a game can be repeated many times, good luck and bad luck tend to wash out. [Details...]

Information and Uncertainty - Experiment Software

12. Bayes' Rule Probability Elicitation

This program sets up an individual decision-making task in which each person obtains a private signal about which of two events has ocurred ("Red" or "Blue") and must report a probability for one of the events. Earnings are structured so that the optimal decision is to report one's true subjective probability, in a DeGroot/Marshack type of mechanism. This setup allows one to evaluate the extent to which reported probabilities match those implied by Bayes' rule. [Details...]

13. Decision models - Cumulative Prospect theory calculator

This calculator produces prospective outcomes when varying parameters are set into place. [Details...]

14. Framing Effects

This online experiment will ask you to indicate your prefences over potential outcomes of two scenarios. When you have completed the experiment, your results and a discussion will be presented. [Details...]

15. Information Cascade Experiment

This program sets up a sequential decision-making task in which each person obtains a private signal about which of two events has occured ("Red" or "Blue") and must make a public prediction of the event. [Details...]

16. Lemons Market Program

This program runs a market in which sellers select prices and quality "grades" independently on a take-it-or-leave-it basis at the start of each period or "round." Buyers shop in a random sequence and place orders at the posted prices. Buyers observe quality grades prior to purchase in the full-information treatment, but quality is not observed in the asymmetric-information treatment. A higher grade raises seller costs and buyer values. The program collects and displays price and quality information and calculates the theoretical competitive price for the surplus-maximizing grade. Market efficiency is measured as the fraction of maximum possible value created by the trading process, i.e. the ratio of the sum of all buyers' and sellers' earnings to the maximum possible value of this sum. [Details...]

17. Lottery-Choice Experiment with Flexible Arrangement of Decision Problems

This program sets up a series of single-person lottery choices designed to evaluate theories of decision making in risky situations. [Details...]

18. Lottery-Choice Experiment with a Probability-Based Choice Menu

This program sets up a series of single-person lottery choices designed to evaluate the effects of payoff scale variations. The probability of the higher payoff in each lottery is systematically varied in a manner that facilitates inferences about the degree of risk aversion. Lottery choices are arrayed in order as the probability of the high payoff is incremented. [Details...]

19. Principal/Agent Game

This program runs a set of "Principal/Agent" games. The first mover (employer) makes a contract offer, and the second movers (worker) chooses whether to accept the contract. A worker who accepts a contract then chooses an effort level, which is costly to the worker but which benefits the employer. The possible contracts include fixed wage payments, along with possible ex post bonuses, monitoring, penalties, and/or profit sharing. If the contract only specifies a required fixed wage and an optional bonus, then the Nash equilibrium for selfish preferences in a one-shot game is to offer the minimum possible effort, since the wage is paid irrespective of effort. Efforts may be higher with fixed matchings or if participants are concerned with fairness and reciprocity. A number of contract options based (based on penalties and rewards) are also available. The game highlights issues of contract incentives, reciprocity, and strategy. [Details...]

20. Probability Matching Experiment

This program sets up an individual decision problem in which the subject must guess which of two random events will occur. The probability of the more likely event is specified by the experimenter but unknown to the subject, who learns through repeated trials. The program also allows specification of a monetary reward for a correct guess and a smaller reward (or penalty) for an incorrect guess. In addition, there is a hypothetical ("do your best") treatment option. Finally, you specify the number of trials and an initial fixed payment. [Details...]

21. Search Program

Single-person program for conducting experiments regarding sequential consumer search with relative ranks. It is a free software distributed under the General Public License. The licensees have the legal permission to copy, distribute, either verbatim or with modifications, either gratis or for a fee. [Details...]

22. Sequential Search Experiment

This program sets up a single-person decision problem in which the subject pays a cost for each random draw from a specified uniform distribution of prize values. This is a standard sequential search problem. The search sequence stops when a draw is accepted, and the payoff is the accepted draw minus the product of the search cost and the number of purchased draws. The exercise consists of three parts, each with a specified number of search sequences. The search cost and other treatment variables may be different for each part. [Details...]

23. Signaling Game (a.k.a. Beer/Quiche Game)

This program runs a set of two-person signaling games in which one person (the proposer) observes the true state of nature and makes a decision. The other person (responder) sees the proposer's decision but not the state, and makes a response. [Details...]

24. Statistical Discrimination

Participants are divided into equal numbers of "workers" and "employers," with half of the workers being "green" and half "purple." At the beginning of each round, each worker sees a random cost of investment, which is an independent draw from a uniform distribution on [0, 100]. This cost draw is private information. [Details...]

25. The Allais Paradox

This online experiment will ask you to indicate your prefences over two sets of potential gambles. When you have completed the experiment, your results and a discussion will be presented. [Details...]

26. The Ellsberg Paradox

This online experiment will ask you to indicate your prefences over two sets of potential gambles. When you have completed the experiment, your results and a discussion will be presented. [Details...]

Information and Uncertainty - Web Site

27. Risk Aversion in the Laboratory: Data and Code

Data and code from some well-known risk-aversion experiments. [Details...]

Information and Uncertainty - Online Book

28. Modeling Bounded Rationality

The basic motivation for studying models of bounded rationality springs from our dissatisfaction with the models that adhere to the "perfect rational man" paradigm. This dissatisfaction results from the strong tension arising from a comparison of the assumptions made by economic modelers about "perfect rationality" with observations about human behavior. This situation would be much less disturbing if we were able to perceive microeconomic models as "miraculous machines" that produce empirical linkages between economic parameters. I doubt that this is the case. I adhere to the view that the main objective of economic theory is to deduce interesting relationships between concepts that appear in our reasoning on interactive situations. Adopting this approach makes it important to examine the plausibility of the assumptions, and not only the conclusions. [Details...]

Information and Uncertainty - Software Tool

29. Iowa Electronic Markets

The Iowa Electronic Markets are real-money futures markets in which contract payoffs depend on economic and political events such as elections. These markets are operated by faculty at the University of Iowa Tippie College of Business as part of our research and teaching mission. [Details...]

30. Mouselab

The MOUSELAB program can be used to present the instructions for an experiment, present decision problems using one of four general types of screens or "schemas," and automatically record what information was acquired, the duration of the acquisition, search order, and the final judgment or choice. Response times are recorded to an accuracy of 1/60th of a second. In addition to MOUSELAB, the decision laboratory software includes a program called BISECT that can be used in the analysis and reduction of the data generated from the process tracing studies. A final set of programs allow the randomization and counterbalancing of MOUSELAB input files. The programs that make up the mouse decision laboratory software are coded in Microsoft Pascal, Version 4.0, with some of the auxiliary programs for data analysis written in Borland's Turbo Pascal. [Details...]

Information and Uncertainty - Experiment Software Configuration

31. ID-PS1-DA

This is a configuration file for a double auction asset market experiment. There are three states that determine dividends for two trader types. There is no private information in this market, so the prices and allocations can be compared to the private information equilibrium. [Details...]

32. ID-SSW-DA

This is a configuration file for a double auction asset market experiment. This is known as the "asset bubble" experiment, because there is typically a run up in the asset price above its fundamental value in the middle of the experiment, with the run up in price followed by a crash in the asset price. [Details...]

Information and Uncertainty - Non-computerized experiment

33. An Experimental Test of Preferences for the Distribution of Income

his study investigates the question of how much income redistribution individuals desire in society with random differences in individual incomes. The experiments confronted individuals with choices of lotteries determining their own payoffs -- to determine individual risk aversion -- and with choices of lotteries determining payoffs to everyone in the group -- to determine preferences regarding the distribution of income. Comparison of the results reveal whether preferences for income redistribution are based solely on an individual "insurance motive" or involve preferences for a more equal distribution of income within the group than is explained by individual risk aversion. The results show that the subjects were risk averse but they did not display the extreme risk aversion implied by a Rawlsian maximin rule. The experiments produced conflicting evidence regarding the question of whether individuals favor a more equal income distribution than can be explained by individual risk aversion. [Details...]

34. Economic Efficiency and the Role of Prices: Market Sessions for Use in Classrooms

In order to give economics students a better intuition for how an economy or a market works, exercises can be introduced directly into the classroom. The following three classroom games are designed to maintain student interest, promote involvement, and provide a way for the instructor to control the parameters of the game so that the outcomes directly relate to the basic concepts and lessons offered in the text. The concepts illustrated by the sessions are 1) the greater efficiency of resource allocation in a market economy as compared to a command economy, 2) the role of information in the efficient allocation of resources, and 3) that institutions matter. [Details...]

35. Perceptions of Chance and the Efficient Market Hypothesis: A Classroom Experiment

The efficient market hypothesis is one of the most difficult concepts to teach undergraduate students. This difficulty arises from the false knowledge which students bring to the classroom. Many students are born chartists, like many members of the financial community, certain that predictable patterns exist in stock price data. Most likely these beliefs are due to an inability to distinguish correlated data from uncorrelated data, as observed in psychological studies of the hot hand fallacy and the gambler's fallacy. The classroom experiment described in this article is designed to illustrate students' misperceptions of chance. Students are asked to pick one of five sequences as being uncorrelated over time. The experiment is presented in terms of true/false exams, a natural context for students. Results are consistent with the psychological literature; the modal response is a sequence with slight negative autocorrelation. Follow-up questions and discussions are also described. These are designed to make connections between the experiment, the psychological literatures on perceptions of random sequences, and the efficient market hypothesis. [Details...]

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