Simple bets to elicit private signals
(with Aurelien Baillon) Theoretical Economics (2021), 16(3), pp.777-797.
Two betting mechanisms elicit unverifiable truth when agents do not have a common prior and are not risk-neutral.
This paper introduces two simple betting mechanisms, Top-Flop and Threshold betting, to elicit unverifiable information from crowds. Agents are offered bets on the ratings of an item about which they received a private signal versus that of a random item. We characterize conditions for the chosen bet to reveal the agents’ private signal even if the underlying ratings are biased. We further provide micro-economic foundations of the ratings, which are endogenously determined by the actions of other agents in a game setting. Our mechanisms relax standard assumptions of the literature such as common prior, and homogeneous and risk neutral agents.
Measuring tastes for equity and aggregate wealth behind the veil of ignorance
(with Jan Heufer and Jason Shachat)
Is social preference behind a veil of ignorance the same as risk preference?
We propose an instrument to measure individuals’ social preferences regarding equity and efficiency behind a veil of ignorance. We pair portfolio and wealth distribution choice problems which have a common budget set. For a given bundle, the distribution over an individual’s wealth is the same for both problems. The portfolio choice serves as a benchmark to evaluate whether the wealth distribution choice exhibits equity or efficiency preferring tastes. We report experiments using a within-subject design testing the veracity of this instrument. We find clusters of equity preferring, efficiency preferring, and socially agnostic individuals through reduced form, revealed preference, and structural estimation analyses. Moreover, we find that individuals’ preferences for equity and efficiency behind the veil of ignorance are not correlated with their risk preferences.
Revealed preferences over experts and quacks and failures of contingent reasoning
Can we distinguish experts and quacks? Are we over-paying for quacks and under-paying for experts?
In many economic scenarios, people face incomplete information about the payoff-relevant states of the world, and they may resort to different tests (e.g., analysts, medical diagnoses, or psychic octopuses) to obtain information to reduce their risk exposure. This paper studies how people evaluate and choose tests. Are they able to avoid useless ones (quacks) and identify genuinely useful ones (experts)? Are they over-paying for quacks and under-paying for experts, and why? I develop a novel experiment wherein people face a rich and structured choice set of expert and quack tests and choose their favorite ones through a graphic coloring task. I find that people do fail to distinguish experts and quacks on a large scale, and they are over-paying for quacks but accurately paying for experts. These results are not driven by the standard explanations suggested in the literature, including belief updating bias, failure in best-responding, and intrinsic preference over certain information characteristics. Instead, I show that the main culprit is the failure of contingent reasoning in information processing. That is, people cannot correctly foresee how expert and quack tests influence their decision problems for all contingencies. The failure of contingent reasoning underlies many decision problems in behavioral economics and game theory and provides new implications for these fields.
Will bayesian markets induce truth-telling? —An experimental study
An experimental test of a market-based elicitation mechanism for private signals.
The Bayesian market (Baillon (2017)) is a new mechanism that incentivizes individuals to report their private signals truthfully. This paper tests the performance of Bayesian markets and studies how they are influenced by the equilibrium requirement of truth-telling. I construct laboratory Bayesian markets with three different degrees of manipulation in participants’ beliefs over others’ truthfulness. I find that Bayesian markets effectively induce truthful revelations when participants believe that others are truthful. However, when there are noises in agents’ beliefs, Bayesian markets become less effective. The existence of speculative buyers in the market exacerbates participants’ under-inference bias in processing private information. In the market with the most significant disturbances, individuals ignore their private signals. As a result, they expect the value of the asset is higher than its fundamental value and thus are more likely to buy an asset. The over-buying inclination raises the ex-post realization of asset values in Bayesian markets, leading to market bubbles and under-performance of the mechanism.
Commitment and communication in Bayesian persuasion: theory and experiment
(with Yun Wang)
When a sender has private information and communicates with a receiver, how to persuade and transmit information?
Revealed preference over lotteries on a probability simplex
(with Jason Shachat)
What does the indifference curve look like on a probability simplex?
Correcting the Bayesian truth serum for risk attitudes
A betting mechanism extends the application of the Bayesian truth serum for risk-averse (loving) agents.