Papers

Title	Authors	Year	Abstract	Downloads	Keywords
Trade, Voting, and ESG Policies: Theory and Evidence	John Duffy, Dan Friedman, Jean-Paul Rabanal, Olga Rud	2023	We model the interaction between shareholder trading and voting on an ESG policy under different sets of preferences, and then test equilibrium predictions of the model in the laboratory. The model suggests, and laboratory results confirm, that low policy costs favor policy adoption and that intermediate costs lead to a lower rate of policy adoption under dispersed preferences than under polarized preferences. Observed share prices are higher than equilibrium predictions when the policy is adopted. This suggests that incumbent shareholders' capital loss when adopting ESG policies may be less than anticipated.	Trade, Voting and ESG	shareholder voting, social responsibility, ESG, experimental finance
A Model of Multiple Selves	Zeyu Liu, Dan Friedman, Simon Weidenholzer	2023	We propose a model of individual decision making that separates a central executive system (“Ego”) from a sub-self with long-term preferences (“Cold”) and an impulsive sub-self (“Hot”). Ego cares only about the payoffs of the other two subselves and allocates available resources between them. For standard neoclassical preferences over joint consumption, we show that in subgame perfect Nash equilibrium, Ego will choose a resource allocation that enables neither Hot nor Cold to consume their most preferred affordable bundle. Instead, they each choose a more extreme and specialized bundle than they would choose if they unilaterally controlled all available resources.	A Model of Multiple Selves	Multiple self, Menu dependence, Individual choice
Disentangling Risk Attitudes and Other-Regarding Preferences: Theory and Experiment	Paul Feldman, Kristian López Vargas	2023	This paper investigates risk and other-regarding preferences within a framework that parallels Epstein-Zin’s. Our model can explain key behavioral patterns in the combined domain and is the first to disentangle elementary attitudes towards risk, altruism, social substitution, ex-ante inequality, and ex-post inequality. We parameterize the model and test its predictions using a laboratory experiment with four decision environments based on convex choice sets. Our findings are consistent with the model, showing that most subjects adjust their risk attitudes due to ex-post inequality concerns and exhibit ex-ante fairness-seeking behavior. Our structural analysis at the individual level allows us to characterize people’s heterogeneity of preferences over five fundamental dimensions.	Disentangling Risk and Other-Regarding Preferences	Risk Attitudes, Social Preferences, Other-Regarding preferences, Fairness, Inequality, Ex-Ante Fairness, Ex-Post Fairness, Epstein-Zin preferences
Information, Asset Price Volatility, and Liquidity	Dan Friedman, Grace Gu, Vivian Juehui Zheng	2023	How does public information on asset payoffs affect private information acquisition and aggregated market information? In turn, how do private information and market information affect asset price volatility and liquidity? What are the roles of information costs and market competitivity? To investigate such questions, we derive theoretical predictions from a stylized bond market model where investors receive public information on default probability and then can purchase costly private information on the repayment recovery rate should a default occur. We test those implications in the laboratory with human subjects as investors. They trade bonds in markets with three different levels of competitivity. We also control and vary exogenously the information cost schedules and default probabilities. The laboratory data support most of the theoretical predictions, e.g., traders purchase more private information and price is more efficient when information is less expensive, when the market is less competitive, and when the public information indicates more ominous conditions. In turn, more private information purchases and less competitive markets increase the bond’s overall price volatility and liquidity. However, ominous public information can increase volatility and decrease liquidity. This paper highlights the roles of public information and market competitivity, and their interactions with private information. The laboratory data analysis emphasizes the “good” and “bad” components of price volatility, which are difficult to disentangle in field data. Our results also suggest policy implications, e.g., tradeoffs between asset price volatility and liquidity.	Information, Asset Price Volatility, and Liquidity	Information aggregation, Price efficiency, Asset price volatility, Liquidity, Laboratory experiment
Motives for Delegation in Financial Decision Making	Simon Weidenholzer, Mikhail Freer	2023	Why do investors delegate financial decisions to supposed experts? We report a laboratory experiment designed to disentangle four possible motives. Almost 600 investors drawn from the Prolific subject pool choose whether or not to delegate a real-stakes choice among lotteries to a previous investor (an “expert”) after seeing information on the performance of several available experts. We find that a surprisingly large fraction of investors delegate even trivial choice tasks, suggesting a major role for the blame shifting motive. A larger fraction of investors delegate our more complex tasks, suggesting that decision costs play a role for some investors. Some investors who delegate choose a low quality expert with high earnings, suggesting a role for chasing past performance. We find no evidence for a fourth possible motive, that delegation makes risk more acceptable.	Motives for Delegating Financial Decisions	Delegation, Copy trading, Experimental finance
Algorithmic Assortative Matching on a Digital Social Medium	Kristian López Vargas, Julian Runge, Ruizhi Zhang	2022	Humans are increasingly interacting in and operating their daily lives through structured digital and virtual environments, mainly through apps that provide media for sharing photos, messaging, gaming, collaborating, or video watching. Most of these digital environments are offered under “freemium” pricing to facilitate adoption and network effects. In these settings, users’ early social interaction and experience often have a substantial impact on their longer term behavior. On this background, we study the impact of an algorithmic system that matches new users to existing communities in an assortative manner. We devise a machine learning–based matching system that identifies users with high expected value and provides them the option to join highly active, in terms of engagement and expenditure, teams. We deploy this mechanism experimentally in a digital social game and find that it significantly increases user engagement, spending, and socialization. This finding holds for more active communities and overall. Teams matched with low-activity new users are negatively impacted, leading to an overall more segregated social environment. We argue that social experience and social behavior in groups are likely mechanisms that drive the impact of the matching system.	Algorithmic Assortative Matching on a Digital Social Medium	Experiment, Field, Markets, Matching
Correcting Misperceptions About Trends and Norms to Address Weak Collective Action	Hanna Fuhrmann-Riebel, Ben D'Exelle, Kristian López Vargas, Sebastian Tonke, Arjan Verschoor	2022	We study how correcting people’s beliefs about social norms and behavioral trends encourages collective action in a setting where the desired behavior is not yet prevalent. In a field experiment among 1,709 subjects, we test whether low sign-up rates for a recycling program in urban Peru can be increased by providing information (1) that most people regard participation in the program as important, i.e., on the "injunctive norm", (2) on an increasing recent trend in sign-up rates. Correcting inaccurate beliefs increases sign-up decisions significantly among people who underestimate either the injunctive norm or the positive trend. This evidence demonstrates that belief updating can be used effectively to encourage collective action where it is currently weak.	Correcting Misperceptions About Trends and Norms to Address Weak Collective Action	Belief updating, social norms, recycling, collective action
Efficiency in Queuing Under Decentralized Mechanisms	Kristian López Vargas, Brett Williams, Shuchen Zhao	2022	Efficiency in Queuing Under Decentralized Mechanisms 2022 We study, theoretically and in the laboratory, three simple decentralized mechanisms to reallocate positions in a queuing problem. In our environment, players have heterogeneous values for time and arrive in random order to a queue before service starts. While waiting for service, they can switch positions, with different rules depending on the mechanism in place. We mainly focus on three institutions: voluntary swapping upon request, take-it-or-leave-it (TIOLI) monetary offers, and a non-fungible reputation point system (“social token”). Compared to the initial order of the lines, we find modest efficiency gains when swapping and the social token are in place. In contrast, we find a sizable efficiency improvement in queues with monetary transfers. Although TIOLI improves efficiency, this gain comes at the cost of higher inequality. We also study these mechanisms with and without unilateral communication from the switch requester. We find this form of cheap talk has no impact on the main studied outcomes.	Efficiency in Queuing Under Decentralized Mechanisms	Queuing, Decentralized mechanisms, TIOLI, Auction, Indirect Reciprocity
Messenger and Spillover Effects on Infant Immunization: A Field Experiment	Kristian Lopez-Vargas, Sandro Parodi, Indhira Ramirez, Paola Villa-Paro	2022	We study the messenger and spillover effects of an information campaign about infant immunization. These are two crucial yet little-understood aspects of policies aiming at behavioral change. We conducted a large field experiment in urban areas of the Dominican Republic where treated households received weekly voice messages providing information and encouragement for infant immunization. We implemented three conditions delivered via voice calls. One group received messages from a generic radio host (RH); the second group received the same messages from the country’s vice president (VP) and the control group. Our design allows us to study the spillover effects of these interventions. We find that receiving either type of message increases the number of administered vaccines and improves immunization timeliness. Notably, only the VP messages have spillover effects among untreated households. When surrounded by more VP-treated households, control households improve in all outcomes. RH treatment shows no spillover effects. We conduct a simulation exercise to predict the overall gain of scaling up such policies. We find that a campaign based on VP messages is more effective than the RH alternative. A campaign where 10% of the target population receives messages from a well-regarded public figure generates an increment of vaccine doses of over 25% in the population.	Messenger and Spillover Effects on Infant Immunization: A Field Experiment	Vaccines, Immunization, RCT, Experiment, Nudges, Spillovers.
On the empirical relevance of correlated equilibrium	Dan Friedman, Jean Paul Rabanal, Olga Rud Rabanal, Shuchen Zhao	2022	Absent coordinating signals from an exogenous benevolent agent, can an efficient correlated equilibrium emerge? Theoretical work in adaptive dynamics suggests a positive answer, which we test in a laboratory experiment. In the well-known Chicken game, we observe time average play that is close to the asymmetric pure Nash equilibrium in some treatments, and in other treatments we observe collusive play. In a game resembling rock-paper-scissors or matching pennies, we observe time average play close to a correlated equilibrium that is more efficient than the unique Nash equilibrium. Estimates and simulations of adaptive dynamics capture much of the observed heterogeneity across player pairs as well as dynamic regularities.	On the empirical relevance of correlated equilibrium	Correlated equilibrium, Laboratory experiment, Adaptive dynamics
Order Protection Through Delayed Messaging	Eric M. Aldrich, Daniel Friedman	2022	Several financial exchanges (e.g., IEX and NYSE American) recently introduced messaging delays to protect ordinary investors from high-frequency traders who exploit stale orders. To capture the impact of such delays, we propose a simple parametric model of the continuous double auction market format. The model examines the dynamics of midpoint pegged order queues and finds their steady states. It shows how messaging delays can protect pegged orders and improve investor welfare, but typically increase queuing costs. Recently available field data show that the empirical distribution of queued pegged orders is highly leptokurtotic and resembles the discrete Laplace distribution predicted by the model.	Order Protection through Delayed Messaging	High-frequency trading, Continuous double auction, Pegged orders, IEX.
Policies for transactional de-dollarization: A laboratory study	Johar Arrieta Vidal, David Florián Hoyle, Kristian López Vargas, Valeria Morales Vásquez	2022	Partial currency substitution typically occurs in small open economies amid economic crises. Often, the foreign currency continues to circulate even after macroeconomic stability returns. Central banks have responded by applying de-dollarization policies. We extend the model in Matsuyama et al. (1993) and implement an experiment to study the effectiveness of two policy instruments: (1) taxes on domestic transactions in foreign currency and (2) a reduction in the storage cost of local currency. We contribute to the theoretical literature by characterizing a new circulation regime for small open economies where agents use the foreign currency solely for international trade and settle domestic transactions exclusively in local currency. Our experimental evidence suggests that both taxes and storage cost reductions can foster de-dollarization as they reduce foreign currency acceptance and reinforce the use of local currency. However, we find that the impact of a reduction in the storage costs of the local currency is more significant and robust. It lowered the acceptance rate of foreign currency by more than 20 percentage points and increased the acceptance of local currency by more than 30 percentage points. On the other hand, the tax policy reduced foreign currency acceptance by a smaller amount and only for encounters with foreign agents.	Policies for Transactional De-Dollarization: A Laboratory Study	Bimonetary economy, Dollarization, Central bank, Monetary policy, Experiment, Money
Private Information, Asset Price Volatility, and Liquidity	Dan Friedman, Coauthored with Grace Weishi Gu and Vivian Juehui Zheng	2022	How does public information indicating ominous economic conditions affect traders’ acquisition of private information? How does that private information affect asset price volatility and liquidity? To investigate such questions, we derive theoretical predictions from a stylized bond market model where investors receive public information on default probability and then can purchase costly private information on the repayment recovery rate conditional on default. We implement such markets in the laboratory, and allow human investors to trade under three different market formats with controlled variation in information cost schedules and default probabilities. The laboratory data support most of the theoretical predictions, e.g., traders purchase more private information when it is less expensive and when the public information conveys more ominous conditions. In turn, more private information purchase increases the bond’s overall price volatility and liquidity. Additional results concern trader profitability and price efficiency. This paper highlights the role of public information in private information acquisition and the impact of their interaction on asset market volatility and illiquidity trade-off, and thus may provide useful policy implications.	Private Information, Asset Price Volatility, and Liquidity	public information; private information; asset price volatility; liquidity; laboratory experiment; BDM mechanism; call market; continuous double auction
Separation of Powers and Electoral Rules: A Laboratory Study of Presidential Democracies	Kristian López-Vargas	2022	Over one-third of the countries worldwide are presidential democracies, and, in the last half-century, many of these countries are moving from electing their president with plurality rules to using runoff systems. Importantly, major questions on the functioning of the core institutions of these democracies remain open. We study theoretically and empirically two institutions: (i) the electoral rule for choosing the president (plurality versus runoff); and (ii) the separation of powers modeled as a Congress that can veto the president’s proposed budget allocations. We present a model of a presidential system with heterogeneous citizens and politicians participating in an election process and a public-budget allocation.The model predicts that separation of powers may promote a more egalitarian budget allocation through alliances at the election stage or bargaining in the elected congress. The run-off system increases the opportunity of the second largest electoral group to win the presidency. We deployed a laboratory experiment to study this setting empirically. We find that the existence of Congress does not exhibit an average impact on electoral results, budget allocations, or welfare. Nonetheless, Congress does help to increase the budget allocated to policies that favor the opposition when the president won a fragmented election. This shows that Congress might work as insurance for the opposition. Moreover, majority runoff electoral rule (as opposed to plurality) affects election and administrative results only when there is a Congress. The probability of the most popular candidate being elected decreases, which shifts the budget away from the policy of his preference. In turn, this increases inequality and reduces welfare.	Separation of Powers and Electoral Rules: A Laboratory Study of Presidential Democracies
The impact of ETF index inclusion on stock prices	John Duffy, Daniel Friedman, Jean Paul Rabanal	2022	A growing body of evidence suggests that assets included in market indexes trade at a premium relative to excluded assets. Here we look for evidence of such an index inclusion premium in a carefully controlled laboratory experiment. Our environment involves three assets and an Exchange Traded Fund (ETF) index asset. We model Authorized Participants (APs) as bots that create and redeem ETF shares by scanning the order books of the underlying assets. In one treatment, all three assets are included in the ETF index asset. In a second treatment, one of the three assets is excluded from the ETF index and is replaced by a second unit of one of the included assets; the included and excluded assets have identical fundamental values enabling a clean test of whether there exists an index inclusion premium. In a further variant of the excluded asset treatment, short-selling is allowed. We find that inclusion of an asset in the ETF index results in a substantial price premium. This is due to investors’ strong demand for the ETF asset and use of a buy-and-hold strategy that reduces the tradeable supply of the assets that underlie the ETF asset and increases their price. Shortselling helps to alleviate the supply problem, but given the strong demand for the ETF asset, the inclusion premium persists.	The Impact of ETF Index Inclusion on Stock Prices	Index inclusion premium, ETFs, experimental finance
Varieties of Risk Preference Elicitation	Brett Williams, Dan Friedman, Duncan James, Sameh Habib	2022	We explore risk preference elicitation via direct choice over lotteries. Our choice tasks differ incrementally, e.g., from choosing between two lotteries to selecting a portfolio from a continuous set of bundled Arrow securities, and from text to spatial presentation. Each subject completes multiple instances of five different tasks, and responses for each task are summarized in parametric (CRRA) and non-parametric (normalized risk premium) measures of risk preference. Variation in task attributes explains much of the observed wide variation in elicited preferences and in correlations across task pairs. Published in Games and Economic Behavior 2022; online link is https://doi.org/10.1016/j.geb.2022.02.002	Varieties of Risk Preference Elicitation	Risk Aversion, Experiment, Elicitation, Multiple Price List
A simulation study of how religious fundamentalism takes root	Jijian Fan, Dan Friedman, Jonathan Gair, Sriya Iyer, Bartosz Redlicki, Chander Velu	2021	Religious fundamentalism is observed across the world. We investigate its roots using agent-based simulations of religiosity dynamics in a spatially dispersed population. Agents’ religiosity responds to neighbors via direct interactions as well as via club goods effects. A simulation run is deemed fundamentalist if the final distribution contains a cohesive subset of agents with very high religiosity. We investigate whether such distributions are more prevalent when model parameters are shifted to reflect the transition from traditional societies to the modern world. The simulations suggest that the rise of fundamentalism in the modern world is aided by weaker attachment to the peer group, greater real income, and less compatibility between religious and secular goods, and arguably also by higher relative prices for secular goods and lower tolerance. Surprisingly, the current model suggests little role for the rise of long-distance communication and transportation.	A Simulation Study of How Religious Fundamentalism Takes Root	Fundamentalism, Club goods, Agent-based models
Improving the Cost-Effectiveness of the Conservation Reserve Program: A Laboratory Study	Peter Cramton a, Daniel Hellerstein, Nathaniel Higgins, Richard Iovanna, Kristian López-Vargas, Steven Wallander	2021	The Conservation Reserve Program (CRP) is arguably the world's largest payments-for-ecosystem services program, with $1.8 billion paid to farmers in 2017 for practices on 23.4 million acres. The CRP uses a pay-as-bid, reverse auction with field-specific price caps to enroll most of the land in the program. Economic theory and empirical studies from other domains suggest that the restrictive price-cap auction format used in the current design of the CRP exhibits issues in terms of efficiency and cost-effectiveness. Using a laboratory experiment, we study the impact of varying the tightness of the price-cap auctions. We also examine two alternative auction formats based on reference prices. We find that excessively tight bid caps reduce efficiency and cost effectiveness by discouraging participation. Conversely, bid caps set too high also reduce cost-effectiveness by allowing higher rents. An exogenous reference price ranking format, which makes medium-cost sellers more competitive against low-cost sellers, reduces both efficiency and cost-effectiveness. An endogenous reference price format increases cost-effectiveness by increasing participation and reducing rents.	Improving the Cost-Effectiveness of the Conservation Reserve Program: A Laboratory Study	Auctions, Environmental, Experiment, Laboratory, Markets
Naturally Occurring Preferences and General Equilibrium	Dan Friedman, Ryan Oprea, Sean Crockett	2021	Prior laboratory experiments have studied general equilibrium economies constructed from ''induced preferences" for artificial goods. We introduce new methods that allow us to study economies constructed instead from subjects' actual, ''homegrown" preferences. Our subjects reveal their preferences by choosing portfolios of Arrow securities from budget lines through fixed endowments for a series of prices. We then construct several different economies by sorting subjects according to their revealed preferences. The constructed economies exhibit a wide range of predicted outcomes, where predictions are competitive general equilibria given the revealed preferences. Perhaps surprisingly, in every one of our markets the predicted excess demand is well-behaved, and avoids the pathologies highlighted in the Sonnenschein-Mantel-Debreu theorem. (The main reason seems to be heterogeneity in revealed preferences.) Actual trade in the constructed economies using a tatonnement market institution closely tracks predictions in most markets. The exceptions occur in economies with severe wealth effects that generate excess demands that are flat relative to measured preference volatility. Final version published in International Economic Review, 62:2, pp. 831-859 (2021)	Naturally Occurring Preferences and General Equilibrium: A Laboratory Study 1 Naturally Occurring Preferences and General Equilibrium 2	Experimental Economics, General Equilibrium, Aggregation, Portfolio Choice, Heterogeneity, Risk Preferences, tatonnement.
An Experimental Investigation of Price Dispersion and Cycles	Dan Friedman, Ed Hopkins, Timothy Cason	2020	We report a continuous time laboratory experiment studying the classic Burdett and Judd (1983) model, which features a unique Nash equilibrium (NE) that has dispersed prices. Adaptive dynamics predict that the NE is stable for one parameter set we use, and unstable for another parameter set. We find that time average dispersions are close to the NE distribution for the stable parameter set, but skew towards prices higher than NE for the unstable parameter set. We offer an empirical definition of price cycles in terms of changes over time in robust measures of central tendency (median) and dispersion (interquartile range). By that definition, the data exhibit persistent cycles in both treatments, with larger cycle amplitudes for the unstable parameters. A slightly updated version is forthcoming in Journal of Political Economy	An Experimental Investigation of Price Dispersion and Cycles	Price dispersion, laboratory experiment, cycles, stability of equilibrium
An oTree-based Flexible Architecture for Financial Market Experiments	Eric M. Aldrich, Hasan Ali Demirci, Kristian López Vargas	2020	This document presents an architecture for experiments in finance. The architecture builds on oTree, a modern platform for behavioral experiments, allowing for sophisticated economic environments, market institutions, and trader strategies. The system supports both continuous-and discrete-time markets, and allows for communication latencies at time resolutions of 10–20 ms. Such precise communication latencies facilitate the experimental study of high-frequency trading. The architecture also modularizes its main components, which makes the system flexible, portable, and scalable.	An oTree-Based Flexible Architecture for Financial Market Experiments	Auctions, Experiment, Experimental Finance, Laboratory, Markets
oTree Markets	Morgan Grant	2020	This paper presents oTree Markets, a flexible framework for the construction of market simulation experiments in oTree. oTree Markets provides three components: a Python implementation of a Contin- uous Double Auction exchange, a reference text-based interface and an oTree layer for communication and state management. These three components are designed with modularity in mind, with the intent that each of them could be replaced with modified versions to suit the needs of a wide variety of market simulation experiments.	oTree Markets	oTree, Markets, Market Design, Experimental Economics
Price Caps and Scores in Multi-Object, Pay-As-Bid Procurement Auctions	Kristian López Vargas, Gregory Klevans	2020	We study three multi-unit, pay-as-bid procurement auction formats where there is one buyer, N sellers, and the buyer has access to a signal of each seller’s opportunity cost. We begin with an analysis of the simple pay-as-bid format, for which we derive a closed-form solution. We then study a format with individual price-caps, where we study the impact of varying the price cap’s tightness. Last, we consider two alternative formats based on scores and reference prices determined either exogenously or endogenously. For all formats but the first, we use combined analytical and numerical methods to characterize optimal bidding and equilibrium predictions. These auction formats are proposed in Cramton et al. (2019) as alternatives for the auctions of the Conservation Reserve Program (CRP) and studied empirically using a laboratory experiment. We calibrate our theoretical auction comparisons in terms of optimal bidding, equilibrium, efficiency, and cost-effectiveness matching the parameters used in the cited paper.	Price Caps and Scores in Multi-Object,Pay-As-Bid Procurement Auctions	Auctions, Market Design, Conservation, Conservation Reserve Program, Price Cap, Reference Price, Procurement Auction
The Effect of Monetary Rewards on Image Motivations in Charitable Giving	Kristian López Vargas	2020	Do monetary incentives always crowd out image motivations in pro-social behavior? The crowding-out theory from previous literature suggests that people who receive monetary rewards for their volunteering activities may be perceived as “profit-seeking” instead of altruistic by the public, and those who care about their philanthropic images are less willing to volunteer if offered a public reward. In this paper, we study the effect of different levels of monetary rewards on image motivations in the context of charitable donations. Our experiment results show that a small reward in terms of a 10% donation rebate does not impose any significant donation behavior changes, both in private and public. When a large reward is given (50% donation rebate), people’s perception of the monetary reward determines whether the reward crowds out donations. For those who believe the reward makes their donations appear “less generous”, a 50% rebate significantly crowds out charitable donations in public; for those who do not associate monetary rewards with a negative image, a high rebate significantly increases their donations in public. We also find that males, in general, are more sensitive to their public images and significantly reduce their donations in public when offered a high reward, while the effects on females are non-significant.	The Effect of Monetary Rewards on Image Motivations in Charitable Giving
The Impact of Observing Peers’ Giving Behavior: A Field Study	Kristian López Vargas	2020	Our paper studies the impact of peer’s giving behavior on people’s willingness to donate. We implement a field experiment on donations to street performers at stoplights on the streets of Lima, Perú. The level of analysis is the vehicle and the treatment condition is defined as observing another vehicle making a donation. We use natural variation in donations made by passing-by drivers, as well as experimentally-manipulated variation in donations made by hired drivers. We study how observing a donation from another vehicle affects the probability and magnitude of donations of treated vehicles. Our experiment results indicate a strong substitution effect of peer influence. When drivers observe another vehicle donate, they are significantly less likely to make a donation to the same performer and overall average donations are lower as well. Our study contributes to the literature by bringing evidence of peer influence in donations from the developing world.	The Impact of Observing Peers’ Giving Behavior: A Field Study
ESA Priorities 2020	Dan Friedman	2019	Three top current priorities for Economic Science Association.	ESA Priorities 2020 Document	ESA priorities, actions
Experimenting with Measurement Error: Comment	Brett Williams, Dan Friedman, Duncan James, Sameh Habib	2019	Gillen, Snowberg and Yariv (2019, henceforth GSY) present an estimation technique called ORIV intended to cope with measurement error, and argue that applying ORIV overturns conclusions obtained in some previous laboratory studies. We agree that not properly accounting for measurement error can invalidate inferences made from laboratory data, and that the ORIV technique can help cope with that problem. However, in this Comment, we (a) show that ORIV applied to GSY's data may actually reinforce previous conclusions regarding the elicitation of risk preferences, and (b) offer cautions for applying ORIV more generally.	Experimenting with Measurement Error: Comment Document
Experiments in High-Frequency Trading: Comparing Two Market Institutions	Eric Aldrich, Kristian Lopez Vargas	2019	We implement a laboratory financial market where traders can access costly technology that reduces communication latency with a remote exchange. In this environment, we conduct a market design study on high-frequency trading: we contrast the performance of the newly proposed Frequent Batch Auction (FBA) against the Continuous Double Auction (CDA), which organizes trades in most exchanges worldwide. Our evidence suggests that, relative to the CDA, the FBA exhibits (1) less predatory trading behavior, (2) lower investments in low-latency communication technology, (3) lower transaction costs, and (4) lower volatility in market spreads and liquidity. We also find that transitory shocks in the environment have substantially greater impact on market dynamics in the CDA than in the FBA. JEL Classification: C91, D44, D47, D53, G12, G14	Experiments in High-Frequency Trading: Comparing Two Market Institutions	Market Design, Auctions, High-Frequency Trading, Continuous Double Auction, Frequent Batch Auction
Interpersonal Comparisons and Risk Attitudes in the Field	Miguel Jaramillo, Kristian López Vargas	2019	We study the impact of interpersonal comparisons on risk preferences in an artefactual field experiment. In our experiment, each decision maker (DM) is randomly paired with someone else in her neighborhood and makes a series of decisions that allows us to measure her risk attitudes under one of three conditions: In treatment 1, the DM’s payoff is above the neighbor’s payoff with certainty. In treatment 2, the DM’s payoff is either above or below depending on her choices and the realized outcomes of the lotteries involved. In treatment 3, DM’s payment is below the neighbor’s payoff with certainty. The neighbor’s payment is fixed within each treatment. We derive three theoretical predictions from an extension of the expected utility theory to incorporate inequity aversion. Although, our evidence shows that risk attitudes are indeed affected by interpersonal comparisons, these findings are only partially consistent with the theory predictions.	Interpersonal comparisons and risk attitudes: An artefactual field experiment	Experiment, Fairness, Field, Other-Regarding, Risk Attitudes
When Are Mixed Equilibria Relevant?	Dan Friedman, Shuchen Zhao	2019	Mixed Nash equilibria are a cornerstone of game theory, but their empirical relevance has always been controversial. We study in the laboratory two games whose unique NE is in completely mixed strategies; other treatments include the matching protocol (pairwise random vs population mean-matching), whether time is discrete or continuous, and whether players can specify mixtures or only pure strategies. Comparing point predictions, NE always does better than maximin and often does no worse than Logit QRE. NE predicts better than Center (50-50 mixes) under mean-matching, but otherwise not as well. By contrast, in a dominance solvable game, NE predicts better than alternatives in all treatments. Qualitative and quantitative dynamic models capture regularities across all treatments.	When Are Mixed Equilibria Relevant?	Nash equilibrium, minimax, mixed strategy, directional learning, laboratory experiment
Dissecting the Monty Hall Anomaly	Christina Louie, Dan Friedman, Duncan James	2017	We assess competing explanations of irrational behavior in the Monty Hall problem by creating new variants of the problem. In some variants we pre-process the merging-of-probability-masses step so as to render transparent that switching has a posterior win probability 2/3. This “Merge” feature also enables systematic variation in informational asymmetry, and in ordering of actions. Data from 77 subjects, each of whom makes 30 switch/not-switch decisions, indicates that Merge raises the switch rate from under 40% to over 80%. Other features examined have much less impact, indicating that the main source of irrational behavior is Bayesian updating failure. This paper is forthcoming in Economic Inquiry.	Dissecting the Monty Hall Anomaly	Monty Hall
A Theoretical Model of the Investors Exchange	Dan Friedman, Eric Aldrich	2017	Investors’ Exchange LLC (IEX) is a newly approved public exchange that is designed to discourage aggressive high-frequency trading. We explain how IEX differs from traditional continuous double auction markets and present summary data on IEX transactions by trader class and order type. Our primary contribution is a simple analytic model of IEX as a constrained version of the continuous double auction. The model predicts that IEX will generally improve price efficiency and lower transactions cost while increasing delay costs. A subset of the model’s predictions are testable in the field or in a laboratory environment.	A Theoretical Model of the Investors Exchange	Market design, IEX, lab experiments, high-frequency trading, continuous double auction.
Payoff and Presentation Modulation of Elicited Risk Preferences in MPLs	Dan Friedman, Duncan James, Sameh Habib, Sean Crockett	2017	Since Holt & Laury (2002), the multiple price list (MPL) procedure has been widely used to elicit individual risk preferences. We assess the impact of varying list order and spacing, and of presentation via text or graphs. Relative to the original MPL baseline, some nonlinear transformations of lottery prices systematically increase elicited risk aversion, while some graphical displays tend to reduce it. This paper appeared in Journal of the Economic Science Association 3, pp. 183-194 (2017).	Payoff and presentation modulation of elicited risk preferences in MPLs	Multiple Price List, Elicitation, Risk Aversion, Experiment
An Experiment on the Core	Dan Friedman, Huibin Yan	2016	Each of n identical buyers (and m identical sellers) wants to buy (sell) a single unit of an indivisible good. The core predicts a unique and extreme outcome: the entire surplus is split evenly among the buyers when m > n and among the sellers when m < n; the long side gets nothing. We test this core conjecture in the lab with n + m = 3 or 5 randomly rematched traders and minimal imbalances (m = n +/- 1) in three market institutions. In the standard continuous double auction, the surplus indeed goes overwhelmingly towards the short side. The DA-Chat institution allows traders to have cheap talk prior to the double auction, while the DA-Barg institution allows the long siders to negotiate enforceable profit sharing agreements while trading. Despite frequent attempts to collude and occasional large deviations from the core prediction, we find that successful collusion is infrequent in both new institutions. A disproportionate fraction of the successful collusions are accompanied by appeals to fairness. Forthcoming, 2016, in Games and Economic Behavior	An Experiment on the Core	Core, Collusion, Laboratory experiment, Fairness, Market
Boiling Frogs Optimally	Bernardo Huberman, Ciril Bosch-Rosa, Dan Friedman	2016	The fraction of a user population willing to tolerate nuisances of size x is summarized in the survivor curve S(x); its shape is crucial in economic decisions such as pricing and advertising. We report a laboratory experiment that, for the first time, estimates the shape of survivor curves in several different settings. Laboratory subjects engage in a series of six desirable activities, e.g., playing a video game, viewing a chosen video clip, or earning money by answering questions. For each activity and each subject we introduce a chosen level x in [xmin; xmax] of a particular nuisance, and the subject chooses whether to tolerate the nuisance or to switch to a bland activity for the remaining time. New non-parametric techniques provide bounds on the empirical survivor curves for each activity. Parametric fits of the classic Weibull distribution provide estimates of the survivor curves' shapes. The fitted shape parameter depends on the activity and nuisance, but overall the estimated survivor curves tend to be log-convex. An implication, given the model of [Aperjis and Huberman, 2011], is that introducing nuisances all at once will generally be more profitable than introducing them gradually. Forthcoming as “Intolerable Nuisances: Some Laboratory Evidence on Survivor Curve Shapes,” in Experimental Economics.	Boiling Frogs Optimally	Internet monetization, online advertising, pricing, reference points, adaptation, laboratory experiment
Emergence of Networks and Market Institutions in a Large Virtual Economy	Curtis Kephart, Dan Friedman, Matt Baumer	2016	Starting with a complete set of transactions from an on-line trading community, we construct trader and goods networks, and track them over time using metrics such as node strength, assortativity, betweenness and closeness. The trading platform was designed to make barter exchange as attractive as possible; money was not part of the design and all players were created equal. Yet, within weeks, several specific goods emerged as media of exchange, and various specialized traders appeared. Eventually trade was predominantly money-mediated and market-makers played a major role. Our results illustrate how network analysis can capture the spontaneous emergence of economic institutions.	Emergence of Networks and Market Institutions in a Large Virtual Economy	Money as medium of exchange, market makers, virtual economy, market efficiency, network analysis
How Fundamentalism Takes Root: A Simulation Study	Dan Friedman, Jijian Fan	2016	We report agent-based simulations of religiosity dynamics in a spatially dispersed population. Agents' religiosity responds to neighbors via pairwise interactions as well as via club goods effects. A simulation run is deemed fundamentalist if the final distribution contains a sizable minority of very high religiosity together with a majority of lesser religiosity. Such simulations are more prevalent when parameter values shift from values reflecting traditional societies towards values reflecting the modern world. The simulations suggest that the rise of fundamentalism in the modern world is boosted by greater real income, lower relative prices for secular goods, less substitutability between religious and secular goods, and less time spent with neighbors. Surprisingly, the simulations suggest little direct role for the rise of long distance communication and transportation.	How Fundamentalism Takes Root: A Simulation Study	Fundamentalism, simulations, agent based models
Multi-product Utility Maximization for Portfolio Recommendation	Dan Friedman, Qi Zhao, Yi Zhang, Yongfeng Zhang	2016	Basic economic relations such as substitutability and complementarity between products are crucial for recommendation tasks, since the utility of one product may depend on whether or not other products are purchased. For example, the utility of a camera lens could be high if the user possesses the right camera (complementarity), while the utility of another camera could be low because the user has already purchased one (substitutability). We propose multi-product utility maximization (MPUM) as a general approach to recommendation driven by economic principles. MPUM integrates the economic theory of consumer choice with personalized recommendation, and focuses on the utility of sets of product sets for individual users. MPUM considers what the users already have when recommending additional products. We evaluate MPUM against several popular recommendation algorithms on two real-world E-commerce datasets. Results confirm the underlying economic intuition, and show that MPUM significantly outperforms the comparison algorithms under top-K evaluation metrics. To be presented at the tenth ACM International WSDM Conference, Cambridge UK (February 2017).	Multi-product Utility Maximization for Portfolio Recommendation	Recommender systems, multiproduct utility
Online Ad Auctions: An Experiment	Dan Friedman, Kevin McLaughlin	2016	A human subject laboratory experiment compares the real-time market performance of the two most popular auction formats for online ad space, Vickrey-Clarke-Groves (VCG) and Generalized Second Price (GSP). Theoretical predictions made in papers by Varian (2007) and Edelman, et al. (2007) seem to organize the data well overall. Efficiency under VCG exceeds that under GSP in nearly all treatments. The difference is economically significant in the more competitive parameter configurations and is statistically significant in most treatments. Revenue capture tends to be similar across auction formats in most treatments.	Online Ad Auctions: An Experiment	Laboratory Experiments, Auction, Online Auctions, Advertising
Recommendation based on Total Surplus Maximization	Dan Friedman, Qi Zhao, Yi Zhang, Yongfeng Zhang	2016	In this paper, we show how to adapt economists' traditional idea of maximizing total surplus (the sum of consumer net benefit and producer profit) to the heterogeneous world of online service allocation, in an effort to promote the web intelligence for social good in online eco-systems. Modifications of traditional personalized recommendation algorithms enable us to apply Total Surplus Maximization (TSM) to three very different types of real-world tasks: e-commerce, P2P lending and freelancing. The results for all three tasks suggest that TSM compares very favorably to currently popular approaches, to the benefit of both producers and consumers. Presented as a long paper at the 25th International World Wide Web Conference, Montreal (April 2016).	Recommendation based on Total Surplus Maximization
Supply Chain Dynamics With Assortative Matching	Eilin Francis	2016	by Caichun Chai, Eilin Francis, and Tiaojun Xiao This paper studies the evolutionarily stable strategies of one-manufacturer and one-retailer supply chains. Each manufacturer and retailer chooses between two pure strategies of management: shareholder-oriented or stakeholder-oriented. Based on its management strategy, the firm decides its wholesale or retail price. In this paper, we consider supply chains formed by two matching processes: random matching and assortative matching. Our results indicate that random matching does not support interior Nash equilibria; the evolutionarily stable strategy is for both manufacturer and retailer to choose shareholder strategy. We extend Bergstrom (2003) to a two-population game, and compare the dynamics of supply chains under random matching and assortative matching. Interior Nash equilibrium is observed with assortative matching. However, this interior equilibrium is unstable. The four unique strategy profiles obtained by various combinations of the two strategy choices may be evolutionarily stable for certain values of the indices of assortativity.	Supply Chain Dynamics With Assortative Matching	Evolutionary games, assorative matching, supply chains
BABEEW5 Program (2015)	Dan Friedman	2015	The program for the fifth Bay Area Behavioral and Experimental Economics Workshop (BABEEW5) hosted at UC Santa Cruz.	BABEEW5 Program (2015)
E-commerce Recommendation with Personalized Promotion	Dan Friedman, Fangfang Tan, Qi Zhao, Yi Zhang	2015	Most existing e-commerce recommender systems aim to recommend the right products to a consumer, assuming the properties of each product are fixed. However, some properties, including price discount, can be personalized to respond to each consumer's preference. This paper studies how to automatically set the price discount when recommending a product, in light of the fact that the price will often alter a consumer's purchase decision. The key to optimizing the discount is to predict consumer's willingness-to-pay (WTP), namely, the highest price a consumer is willing to pay for a product. Purchase data used by traditional e-commerce recommender systems provide points below or above the decision boundary. In this paper we collected training data to better predict the decision boundary. We implement a new e-commerce mechanism adapted from laboratory lottery and auction experiments that elicit a rational customer's exact WTP for a small subset of products, and use a machinelearning algorithm to predict the customer's WTP for other products. The mechanism is implemented on our own e-commerce website that leverages Amazon's data and subjects recruited via Mechanical Turk. The experimental results suggest that this approach can help predict WTP, and boost consumer satisfaction as well as seller profit. This paper appeared in Proceedings of the ACM SIGRecSys 2015 Workshops (held in Vienna, September 2015)	E-commerce Recommendation with Personalized Promotion	E-commerce, WTP, preference elicitation
How moral codes evolve in a trust game	Dan Friedman, Jean Paul Rabanal	2015	This paper analyzes the dynamic stability of moral codes in a two population trust game. Guided by a moral code, members of one population, the Trustors, are willing to punish members of the other population, the Trustees, who defect. Under replicator dynamics, adherence to the moral code has unstable oscillations around an interior Nash Equilibrium (NE), but under smoothed best response dynamics we obtain convergence to Quantal Response Equilibrium (QRE). published in Games 2015, 6, 150-160; doi:10.3390/g6020150	How moral codes evolve in a trust game	Prisoner’s Dilemma; evolutionary stability; moral codes
Morality as a Variable Constraint on Economic Behavior	Dan Friedman	2015	In social creatures, evolutionary forces constrain self-interested behavior in various ways. For humans, group interests are served, and individual self interest is constrained, by the moral system -- the shared understanding of proper behavior. This chapter explores the coevolution of human moral systems and market-oriented institutions. It observes that morals constrain economic behavior in many ways that are seldom recognized in traditional economic models but that have considerable practical importance. The first half of the paper sets the context. All social creatures require some way to resolve the tension between self-interest and group interest. Humans achieve unparalleled degrees of cooperation by means of two distinctive tension reducers. The first is our moral system, and the second is market exchange. The second is particularly important in the modern world, but it still relies on the first, and is constrained by it. The second half of the paper explores some of those constraints and their economic impact on firms’ pricing decisions, on employee relations, on financial market institutions, and on the existence of markets more generally. This paper is scheduled to be published as a chapter in Handbook of Behavioral Economics, edited by R. Franz et al (Routledge, 2016).	Morality as a Variable Constraint on Economic Behavior	Morals, constraints, markets
Multi-Object Auctions with Resale: Theory and Experiment	Emel Filiz-Ozbay, Kristian Lopez-Vargas, Erkut Y. Ozbay	2015	We study multi-object auctions in the presence of post-auction trade opportunities among bidders who have either single- or multi-object demand. We focus on two formats: Vickrey auctions where package bidding is possible and simultaneous second-price auctions. We show that, under complementarities, the Vickrey format has an equilibrium where the objects are allocated efficiently at the auction stage whether resale markets are present or not. The simultaneous second-price, on the other hand, leads to inefficiency with or without resale possibility. Our experimental findings show that the possibility of resale in second-price auctions decreases the efficiency rate at the auction stage compared to the no resale case. However, after resale, the efficiency rate in second-price is as high as that of Vickrey auction without resale outcomes in the experiment. Preventing resale neither benefits nor hurts auction revenues in a second-price format.	Multi-object auctions with resale: Theory and experiment	Auctions, Experiment, Laboratory, Markets
Risk Attitudes and Fairness: Theory and Experiment	Kristian López-Vargas	2015	I study theoretically and empirically the interaction between risk attitudes and other-regarding preferences. I introduce an integrated model of risk attitudes and other-regarding preferences that extends the standard notion of inequity discount to lotteries. In this model, a decision maker perceives inequity partly by comparing the marginal risks she and others face. It predicts that fairness considerations will alter risk attitudes, in particular, a higher tolerance to positively correlated (fair) risks compared to negatively correlated (unfair) risks. It is also capable of explaining the behavior by which people help others probabilistically (known as ex ante fairness). Furthermore, in contrast with the existing view of ex ante fairness based on expected outcomes, my model does not imply that stronger ex ante fairness behavior is associated with less risk sensitivity. I study these predictions with evidence from an experiment. I find that subjects take more risks when outcomes are ex post fair compared to when they are ex post unfair. I confirm ex ante fairness behavior is a common choice pattern and document how, according to the model, it responds to its relative price. Finally, I reject the implication of existing models that stronger ex ante fairness behavior correlates with less risk sensitivity.	Risk Attitudes and Fairness: Theory and Experiment	Risk, Social Preferences, Fairness, Ex ante Fairness, Ex post Fairness
Stability in Competition? Hotelling in Continuous Time	Curtis Kephart, Liam Rose	2015	We study Hotelling's classic duopoly location model in continuous time with flow payoffs accumulated over time and the price dimension made explicit. In an experimental setting, subjects chose price and location in treatments varying only by the speed of adjustment. We find that the principle of minimum differentiation generally holds, with little distance between subjects' location decisions. Price decisions, however, tend to be volatile, consistent with theory. Our data also support recent literature that the ability to respond quickly increases cooperation.	Stability in Competition? Hotelling in Continuous Time	Spatial competition, experiment, continuous time
Continuous Differentiation: Hotelling Revisits the Lab	Curtis Kephart, Dan Friedman	2014	We investigate experimentally the impact of continuous time on a four-player Hotelling location game. The static pure strategy Nash equilibrium (NE) consists of firms paired-up at the first and third quartiles of the linear city. In repeated simultaneous move games (discrete time grid), we fail to obtain convergence to this distinctive NE, as have previous studies. However, with asynchronous moves in continuous time treatments, the NE clearly emerges. This paper is forthcoming in the second issue of JESA.	Continuous Differentiation: Hotelling Revisits the Lab PDF Continuous Differentiation: Hotelling Revisits the Lab ZIP
Continuous Time and Communication in a Public-goods Experiment	Dan Friedman, Gary Charness, Ryan Oprea	2014	We investigate the effects of continuous time and communication on contributions in a public-goods experiment with a set of parameters that make cooperation difficult. We vary whether communication amongst the four people in a group is feasible, as well as whether decisions are made in continuous time during a 10-minute interval or only at 10 discrete points of time during this interval. The data show that continuous time leads to an increase in cooperation relative to a standard protocol and to a very substantial increase when subjects are allowed to communicate in an unrestricted manner. The paper is forthcoming in J Econ Behavior and Organization.	Continuous Time and Communication in a Public-goods Experiment	Public goods, voluntary contribution mechanism, continuous time games
On the Demand for Expressing Emotions	Brit Grosskopf, Kristian Lopez-Vargas	2014	People communicate in economic interactions either aiming to alter material outcomes or because they derive direct satisfaction from expressing. We focus on the latter non-instrumental motivation and find that this less researched aspect of expression has important economic implications. In particular, we experimentally study ex-post verbal expression in a modified Power-to-Take game and document people’s willingness to pay for this kind of expression possibility. Our experiment contributes to previous studies discussing the role of mood-emotional states. We find that purely expressive as well as reciprocal motives are both non-trivial components of the valuation for non-instrumental expression. We demonstrate that expression possibilities have important impacts on welfare beyond what our standard economic view predicts.	On the Demand for Expressing Emotions
The Marginal Utility of Money	Dan Friedman, Jozsef Sakovics	2014	We present a rational model of consumer choice, which can also serve as a behavioral model. The central construct is λ, the marginal utility of money, derived from the consumer’s rest-of-life problem. It provides a simple criterion for choosing a consumption bundle in a separable consumption problem. We derive a robust approximation of λ, and show how to incorporate liquidity constraints, indivisibilities, and adaptation to a changing environment. We find connections with numerous historical and recent constructs, both behavioral and neoclassical, and draw contrasts with standard partial equilibrium analysis. The result is a better grounded, more flexible and more intuitive description of consumer choice. This paper is forthcoming in Theory and Decision.	The Marginal Utility of Money	Budget constraint, Separability, Value for money
Risky Curves: On the Empirical Failures of Expected Utility	Dan Friedman, Shyam Sunder	2014	Penultimate versions of two chapters from a book published February 2014 by Routledge. Coauthored with Duncan James, Mark Isaac and Shyam Sunder Abstract. Seven decades ago, Von Neumann and Morgenstern proposed curved utility functions for explaining choice under risk, generalizing a suggestion two centuries earlier by Daniel Bernoulli. That proposal continues to dominate the field, as theorists continue to devise new parameterized curves (e.g., for value from gains and losses, and for cumulative probability) while experimenters devise new protocols to elicit data and report estimates of parameters. From intensive interest and large volume of this literature, it is easy to get the impression of scientific progress. In this book we show that the empirical harvest so far has, in fact, been quite meager. Estimated parameters (e.g., risk-aversion coefficients) exhibit remarkably little stability outside the context in which they are fitted. Their power to predict out-of-sample is in the poor-to-nonexistent range, and we have seen no convincing victories over naïve alternatives. Outside the laboratory, expected utility theory and its generalizations have provided surprisingly little insight into economic phenomena such as securities, real estate or labor markets, insurance, gambling, or business cycles. It is perhaps time to ask whether the failure to find stable replicable results IS the result. Although our main purpose is to raise doubt about the current approach, we do offer some positive suggestions. We reconsider the meaning and measures of risk and of risk aversion; we recommend using simple expected value criterion, while looking for explanatory power in the constraints and the real options that decision makers face; and we note recent work in evolution, learning, and physiology that someday might lead to a better understanding of, and ability to predict, decisions in an uncertain world.	Risky Curves: On the Empirical Failures of Expected Utility	Risk, preferences
2013 Regional ESA Conference Program	Dan Friedman	2013	2013 Regional ESA Conference October 24-26, 2013 Hotel Paradox Santa Cruz, California Last Revised 08:21:56 PDT, 2013.10.22	2013 Regional ESA Conference Program
Software for Continuous Game Experiments	Curtis Kephart, Dan Friedman, James Pettit, Ryan Oprea	2013	ConG is software for conducting economic experiments in continuous and discrete time. It allows experimenters with limited programming experience to create a variety of strategic environments featuring rich visual feedback in continuous time and over continuous action spaces, as well as in discrete time or over discrete action spaces. Simple, easily edited input files give the experimenter considerable flexibility in specifying the strategic environment and visual feedback. Source code is modular and allows researchers with programming skills to create novel strategic environments and displays. This paper is forthcoming in Experimental Economics.	Software for Continuous Game Experiments	Experimental economics. Continuous time. Software for laboratory experiments.
Incomplete Information, Dynamic Stability and the Evolution of Preferences: Two Examples	Dan Friedman, Jean Paul Rabanal	2013	We illustrate general techniques for assessing dynamic stability in games of incomplete information by re-analyzing two models of preference evolution, the Arce (2007) Principal- Agent game and the Friedman and Singh (2009) Noisy Trust game. The techniques include extensions of replicator and gradient dynamics, and for both models they confirm local stability of the key static equilibria. That is, we obtain convergence in time average for initial conditions sufficiently near equilibrium values. paper is forthcoming in a special issue of Dynamic Games and Applications, 2014.	Incomplete Information, Dynamic Stability and the Evolution of Preferences: Two Examples	Stability, Perfect Bayesian Equilibrium, Evolutionary dynamics
Efficient Investment via Assortative Matching in One-Shot Games: Theory and Evidence	Jean Paul Rabanal, Olga Rud	2013	This paper studies pre-commitment investment strategy in a one shot game, where agents seek to form matches in the presence of an assortative matching rule. We show that a bimodal distribution of investment arises in equilibrium where most players select high levels of investment —achieving a pareto superior solution— meanwhile few stay at the lower bound —the trivial NE. The experimental evidence obtained supports our predictions and shows that the median investment levels are remarkably high, close to 91 percent of the initial endowment. This result is novel as one shot games have generally been unable to produce such high levels of cooperation (efficiency).	Efficient Investment via Assortative Matching in One-Shot Games: Theory and Evidence	Public goods, Assortative Matching, Cooperation, Efficiency
A Continuous Dilemma	Dan Friedman, Ryan Oprea	2012	We study prisoner's dilemmas played in continuous time with flow payoffs over 60 seconds. In most cases, the median rate of mutual cooperation rises to 90% or more. Control sessions with 8-time repeated matchings achieve less than half as much cooperation, and cooperation rates approach zero in one-shot control sessions. In follow-up sessions with a variable number of subperiods, cooperation rates increase nearly linearly as the grid size decreases and, with one-second subperiods, they approach the level seen in continuous sessions. Our data support a strand of theory that explains how the capacity to respond rapidly stabilizes cooperation and destabilizes defection in the prisoner's dilemma. The attached version was published in the AER and won the 2012/13 Exeter Prize.	A Continuous Dilemma	Prisoner’s dilemma, Game theory, Laboratory experiment, Continuous time game
Cycles and Instability in a Rock-Paper-Scissors Population Game: a Continuous Time Experiment	Dan Friedman, Ed Hopkins, Timothy Cason	2012	We report laboratory experiments that use new, visually oriented software to explore the dynamics of 3 × 3 games with intransitive best responses. Each moment, each player is matched against the entire population, here 8 human subjects. A “heat map” offers instantaneous feedback on current profit opportunities. In the continuous slow adjustment treatment, we see distinct cycles in the population mix. The cycle amplitude, frequency and direction are consistent with standard learning models. Cycles are more erratic and higher frequency in the instantaneous adjustment treatment. Control treatments (using simultaneous matching in discrete time) replicate previous results that exhibit weak or no cycles. Average play is approximated fairly well by Nash equilibrium, and an alternative point prediction, “TASP” (Time Average of the Shapley Polygon), captures some regularities that NE misses. This paper appeared in Review of Economic Studies 81:1 (2014)	How FundameCycles and Instability in a Rock-Paper-Scissors Population Game: a Continuous Time Experimentntalism Takes Root: A Simulation Study	Experiments, learning, mixed equilibrium, continuous time
From Imitation to Collusion: Long-run Learning in a Low-Information Environment	Dan Friedman, Ryan Oprea, Simon Weidenholzer, Steffen Huck	2012	We study long-run learning in an experimental Cournot game with no explicit information about the payoff function. Subjects see only the quantities and payoffs of each oligopolist after every period. In line with theoretical predictions and previous experimental findings, duopolies and triopolies both reach highly competitive levels, with price approaching marginal cost within 50 periods. Using the new ConG software, we extend the horizon to 1,200 periods, far beyond that previously investigated. Already after 100 periods we observe a qualitative change in behavior, and quantity choices start to drop. Without pausing at the Cournot-Nash level quantities continue to drop, eventually reaching almost fully collusive levels in duopolies and often reaching deep into collusive territory for triopolies. Fitted models of individual adjustment suggest that subjects switch from imitation of the most profitable rival to other behavior that, intentionally or otherwise, facilitates collusion via effective punishment and forgiveness. Remarkably, subjects never learn the best-reply correspondence of the one-shot game. Our results suggest a new explanation for the emergence of cooperation. A revised version was published in Journal of Economic Theory 155:1, pp. 185-205 (2015).	From Imitation to Collusion: Long-run Learning in a Low-Information Environment	Cournot oligopoly, imitation, learning dynamics, cooperation.
Evolutionary Learning of Policies for MCTS Simulations	James Pettit	2012	Monte-Carlo Tree Search (MCTS) grows a partial game tree and uses a large number of random simulations to approx- imate the values of the nodes. It has proven effective in games with such as Go and Hex where the large search space and difficulty of evaluating positions cause difficulties for standard methods. The best MCTS players use carefully hand-crafted rules to bias the random simulations. Obtain- ing good hand-crafting rules is a very difficult process, as even rules promoting better simulation play can result in a weaker MCTS system [12]. Our Hivemind system uses evo- lution strategies to automatically learn effective rules for bi- asing the random simulations. We have built a MCTS player using Hivemind for the game Hex. The Hivemind learned rules result in a 90% win rate against a baseline MCTS sys- tem, and significant improvement against the computer Hex world champion, MoHex.	Evolutionary Learning of Policies for MCTS Simulations
Evolutionary Dynamics for Playing the Field	Dan Friedman, Daniel Ostrov	2011	Any piecewise-smooth, symmetric two-player game can be extended to define a population game in which each player interacts with a large representative subset of the entire population, i.e., is ``playing the field.'' Assuming that players respond to the payoff gradient over a continuous action space, we obtain nonlinear integro-partial differential equations that are often numerically tractable and sometimes analytically tractable. Economic applications include oligopoly, growth theory, and financial bubbles and crashes. This paper appeared in Journal of Economic Theory 148:2, pp. 743-777 (2013).	Evolutionary Dynamics for Playing the Field	Population games, gradient dynamics, shock waves.
Rejection Pattern of Generous Offers in a Three Player Ultimatum Game: A Tale of Two Tails.	Ciril Bosch-Rosa	2011	We present a three-player game, in which a decision-maker, in the role of referee, accepts or rejects the offer made by a proposer to a passive receiver. The results show a high level of rejection of both selfish and generous offers by the referee. We show that contrary to the best-known models of social preferences, our judge’s decisions are independent of their payoff. In addition, we are able to show that concerns for intentions of proposers are secondary when compared to inequality concerns	Rejection Pattern of Generous Offers in a Three Player Ultimatum Game: A Tale of Two Tails.	Inequality, ultimatum game, fairness, experiment
Separating the Hawks from the Doves	Dan Friedman, Keith Henwood, Ryan Oprea	2011	Human players in our laboratory experiment converge closely to the symmetric mixed Nash equilibrium when matched in a single population version of the standard Hawk-Dove game. When matched across two populations, the same players show clear movement towards an asymmetric (and very inequitable) pure Nash equilibrium of the same game. These findings support a distinctive prediction of evolutionary game theory. This paper is forthcoming in Journal of Economic Theory.	Separating the Hawks from the Doves PDF Separating the Hawks from the Doves zip	Evolutionary dynamics, Hawk-Dove game, Game theory, Laboratory experiment, Continuous time game
Risky Curves: From Unobservable Utility to Observable Opportunity Sets	Dan Friedman, Shyam Sunder	2011	Most theories of risky choice postulate that a decision maker maximizes the expectation of a Bernoulli (or utility or similar) function. We tour 60 years of empirical search and conclude that no such functions have yet been found that are useful for out-of-sample prediction. Nor do we find practical applications of Bernoulli functions in major risk-based industries such as finance, insurance and gambling. We sketch an alternative approach to modeling risky choice that focuses on potentially observable opportunities rather than on unobservable Bernoulli functions.	Risky Curves: From Unobservable Utility to Observable Opportunity Sets	Expected utility, Risk aversion, St. Petersburg Paradox, Decisions under uncertainty, Option theory
The Liberal Tradition in America Reconsidered	Paul Viotti	2011	Utilizing a two-pronged empirical approach, I test the assumption that most Americans are tolerant of growing economic inequality in the United States. My experimental and survey results show that many groups of Americans - e.g., women, Latinos and African-Americans - are more egalitarian than we've been led to expect and are even willing to sacrifice personal gain for the well-being of others. Put another way, the assertion that most Americans are individualistic and attribute differences in socioeconomic outcomes to skill and effort is overstated, as is the notion that Americans largely tolerate inequality in the economic domain, a claim advanced by Hochschild (1981) and later reinforced by Bartels (2008). Scholars in economics and political science have been assuming for over 150 years that Americans tend to think alike on matters of distributive justice. The findings presented in this paper suggest that particular groups in the US are more intolerant of inequality - they often choose in experiments to reduce inequality rather than maximize their own expected income at the individual level.	The Liberal Tradition in America Reconsidered
Human and Artificial Agents in a Crash-Prone Financial Market	Dan Friedman, Todd Feldman	2010	We introduce human traders into an agent based financial market simulation prone to bubbles and crashes. We find that human traders earn lower profits overall than do the simulated agents (“robots”) but earn higher profits in the most crash-intensive periods. Inexperienced human traders tend to destabilize the smaller (10 trader) markets, but have little impact on bubbles and crashes in larger (30 trader) markets and when they are more experienced. Humans’ buying and selling choices respond to the payoff gradient in a manner similar to the robot algorithm. Similarly, following losses, humans’ choices shift towards faster selling. published in Computational Economics 36:3, pp. 201-229 (December 2010)	Human and Artificial Agents in a Crash-Prone Financial Market	Financial markets, Agent-based models, Experimental economics
laboratory financial markets	Dan Friedman	2010	Abstract. Small scale financial markets have been studied in the laboratory for more than two decades. Typically 6-20 human subjects buy and sell units of a single asset whose dividends extend over several periods and/or are uncertain. Such markets permit direct observation of informational efficiency, allow sharp tests of theoretical predictions. They also provide test-beds for policy initiatives, new market formats and automated trading strategies. A slightly improved version of this article appeared as a chapter in the New Palgrave Dictionary of Economics, circa 2010.
Gradient Dynamics in Population Games: Some Basic Results	Dan Friedman, Daniel Ostrov	2009	When each player in a population game continuously adjusts her action to move up the payoff gradient, then the state variable (the action distribution) obeys a nonlinear partial differential equation. Extending techniques from fluid dynamics, we collect some results on the existence, uniqueness and properties of solutions to such equations, find conditions that render gradient adjustment optimal, find sufficient conditions for asymptotic convergence, and use a local form of Nash equilibrium to characterize the limiting distributions. Published in Journal of Mathematical Economics 46.5 (2010): 691-707.	Gradient Dynamics in Population Games: Some Basic Results	Population games, Gradient dynamics, Potential games
Testing the TASP: An Experimental Investigation of Learning in Games with Unstable Equilibria	Dan Friedman, Ed Hopkins, Timothy Cason	2009	We report experiments designed to test between Nash equilibria that are stable and unstable under learning. The TASP (Time Average of the Shapley Polygon) gives a precise prediction about what happens when there is divergence from equilibrium under fictitious play like learning processes. We use two 4x4 games each with a unique mixed Nash equilibrium; one is stable and one is unstable under learning. Both games are versions of Rock-Paper-Scissors with the addition of a fourth strategy, Dumb. Nash equilibrium places a weight of 1/2 on Dumb in both games, but the TASP places no weight on Dumb when the equilibrium is unstable. We also vary the level of monetary payoffs with higher payoffs predicted to increase instability. We find that the high payoff unstable treatment differs from the others. Frequency of Dumb is lower and play is further from Nash than in the other treatments. That is, we find support for the comparative statics prediction of learning theory, although the frequency of Dumb is substantially greater than zero in the unstable treatments.	Testing the TASP: An Experimental Investigation of Learning in Games with Unstable Equilibria	Games, Experiments, TASP, Learning, Unstable, Mixed equilibrium, Fictitious play
Preemption Games: Theory and Experiment	Dan Friedman, Ryan Oprea, Steven Anderson	2009	Several investors face an irreversible investment opportunity whose value V is governed by Brownian motion with upward drift and random expiration. The first investor i to seize the opportunity before expiration receives the current V less a privately known cost Ci; the other investors receive nothing. We characterize Bayesian Nash Equilibrium (BNE) for this game, extending previously known results. We also report a laboratory experiment with 72 subjects randomly matched into 600 tri- opolies. As predicted in BNE, subjects in triopolies invested at lower values than in monopolies, changes in Brownian parameters significantly altered investment values in monopoly but not in triopoly; and the lowest cost investor in a triopoly usually preempted the others. Evidence was mixed on other BNE predictions, e.g., whether higher cost brings smaller markups. Overall, subjects' earnings came rather close to the BNE prediction. forthcoming in American Economic Review	Preemption Games: Theory and Experiment pdf Preemption Games: Theory and Experiment zip	Preemption, Incomplete Information, Irreversible Investment, Laboratory Experiment
Humans, Robots and Market Crashes: A Laboratory Study	Dan Friedman	2009	We introduce human traders into an agent based nancial market simulation prone to bubbles and crashes. We find that human traders earn lower profits overall than do the simulated agents (''robots") but earn higher profits in the most crash-intensive periods. Inexperienced human traders tend to destabilize the smaller (10 trader) markets, but otherwise they have little impact on bubbles and crashes in larger (30 trader) markets and when they are more experienced. Humans' buying and selling choices respond to the payoff gradient in a manner similar to the robot algorithm. Likewise, following losses, humans' choices shift towards faster selling.	Humans, Robots and Market Crashes: A Laboratory Study	Financial markets, Agent-based models, Experimental economics
Preferences, Beliefs and Equilibrium: What Have Experiments Taught Us?	Dan Friedman	2008	The key primitives of microeconomic theory include preferences and beliefs at the individual level, and equilibrium at the aggregate level. In my response to Vernon Smith's target article in JEBO, I focus on what experiments can teach us about these primitives and about the theoretical models that we construct from them.	Preferences, Beliefs and Equilibrium: What Have Experiments Taught Us?
Equilibrium Vengeance	Dan Friedman, Nirvikar Singh	2008	This paper introduces two ideas, emotional state dependent utility components (ESDUCs), and evolutionary perfect Bayesian equilibrium (EPBE). Using a simple extensive form game, we illustrate the efficiency-enhancing role of a powerful ESDUC, the vengeance motive. Incorporating behavioral noise and observational noise leads to seven continuous families of (short run) Perfect Bayesian equilibria (PBE) that involve both vengeful and non-vengeful types. We then show that the evolutionary equilibrium concept shrinks the long-run equilibrium set to two points. In one EPBE, only the non-vengeful type survives and there are no mutual gains. In the other EPBE, both types survive and reap mutual gains. Forthcoming in Games and Economic Behavior.	Equilibrium Vengeance	Reciprocity, Vengeance, Perfect Bayesian equilibrium, Social dilemmas
Bubbles and Crashes - Gradient Dynamics in Financial Markets	Dan Friedman, Ralph Abraham	2008	We develop a financial market model focused on fund managers who continuously adjust their exposure to risk in response to the payoff gradient. The base model has a stable equilibrium with classic properties. However, bubbles and crashes occur in extended models incorporating an endogenous market risk premium based on investors' historical losses and constant gain learning. When losses have been small for a long time, asset prices inflate as fund managers adopt riskier portfolios. Then slight losses can trigger a crash, as a widening risk premium accelerates the decline in asset price. Forthcoming in Journal of Economic Dynamics and Control.	Bubbles and Crashes - Gradient Dynamics in Financial Markets	Bubbles, Escape dynamics, Time varying risk premium, Constant-gain learning, Agent-based models
Bubbles and Crashes: a Cyborg Approach	Dan Friedman, Ralph Abraham	2008	In joint work since 2004 we have created a family of agent-based models for financial markets in which bubbles and crashes occur in imitation of real markets. The evolution of behavioral rules in these models has shed light on some possible mechanisms used by human account managers or traders. Our programming environment, NetLogo, has proved ideal for this work, and also offers a feature, HubNet, capable of extending simulation to include human as well as robot traders. Recently we have used this feature to test a bubbles and crash model in a controlled laboratory environment. The experiment uses agent-based modeling to create a virtual financial market where human subjects act as stock market traders alongside automated robots. We use the experimental data to first test whether humans adjust their exposure to risk in response to a payoff gradient and to test second whether humans perceive risk by responding to an exponential average of their losses. We find that humans do not exactly follow a gradient but are very close. We also find that humans strongly respond to losses putting more weight on the most current losses. However, how they respond to losses depends on the frequency and predictability of crashes. forthcoming, Journal of the Calcutta Mathematical Society.	Bubbles and Crashes: a Cyborg Approach	Bubbles, Crashes, Agent-based models, NetLogo, Financial markets, Escape dynamics, Experimental economics
Laboratory financial markets	Dan Friedman	2008	An article for the Palgrave Dictionary of Economics, Second Edition. Small scale financial markets have been studied in the laboratory for more than two decades. Typically 6-20 human subjects buy and sell units of a single asset whose dividends extend over several periods and/or are uncertain. Such markets permit direct observation of informational efficiency, allow sharp tests of theoretical predictions. They also provide test-beds for policy initiatives, new market formats and automated trading strategies.
BUY IT NOW: A HYBRID INTERNET MARKET INSTITUTION	Dan Friedman, Garrett Milam, Nirvikar Singh, Steven Anderson	2008	This paper analyzes seller choices and outcomes in approximately 700 Internet auctions of a relatively homogeneous good. The 'Buy it Now' option allows the seller to convert the auction into a posted price market. We use a structural model to control for the conduct of the auction as well as product and seller characteristics. In explaining seller choices, we find that the 'Buy it Now' option was used more often by sellers with higher ratings and offering fewer units; and posted prices were more prevalent for used items. In explaining auction outcomes, we find that auctions with a 'Buy it Now' price had higher winning bids, ceteris paribus, whether or not the auction ended with the 'Buy it Now' offer being accepted, possibly reflecting signaling or bounded rationality. We also find that posting prices, by combining 'Buy it Now' and an equal starting price, was an effective strategy for sellers in the sample. This paper appeared in the Journal of Electronic Commerce Research, VOL 9, NO 2, 2008.	BUY IT NOW: A HYBRID INTERNET MARKET INSTITUTION	Market institutions, Posted prices, Auctions, E-commerce
Conspicuous Consumption Dynamics	Dan Friedman	2007	We formalize Veblen's idea of conspicuous consumption as two alternative forms of rank-dependent preferences, dubbed envy and pride. Agents adjust consumption patterns gradually, in the direction of increasing utility. From an arbitrary initial state, the distribution of consumption among agents with identical preferences converges to a unique equilibrium distribution. When pride is stronger, the equilibrium distribution has a right-skewed density. When envy is stronger, the equilibrium is concentrated at a single point, and the adjustment dynamics involve a shock wave that can be interpreted as a growing, moving, homogeneous middle class. This paper is forthcoming in Games and Economic Behavior.	Conspicuous Consumption Dynamics	Veblen effects, Gradient dynamics, Shock waves
Revealed Altruism	Dan Friedman, James C. Cox, Vjollca Sadiraj	2007	This paper develops a theory of revealed preferences over one's own and others' monetary payoffs. We introduce more altruistic than(MAT), a partial ordering over preferences, and interpret it with known parametric models. We also introduce and illustrate more generous than (MGT), a partial ordering over opportunity sets. Several recent discussions of altruism focus on two player extensive form games of complete information in which the first mover (FM) chooses a more or less generous opportunity set for the second mover (SM). Here reciprocity can be formalized as the assertion that an MGT choice by the FM will elicit MAT preferences in the SM and, furthermore, that the effect on preferences is stronger for acts of commission than acts of omission by FM. We state and prove propositions on the observable consequences of these assertions. Then we test those propositions using existing data from investment games with dictator controls and Stackelberg games and new data from Stackelberg mini-games. The test results provide support for the theory of revealed altruism. The copyright to this Article is held by the Econometric Society. It may be downloaded, printed and reproduced only for educational or research purposes, including use in course packs. No downloading or copying may be done for any commercial purpose without the explicit permission of the Econometric Society. For such commercial purposes contact the Office of the Econometric Society (contact information may be found at the website http://www.econometricsociety.org or in the back cover of Econometrica). This statement must the included on all copies of this Article that are made available electronically or in any other format.	Revealed Altruism pdf Revealed Altruism zip	Neoclassical preferences, Social preferences, Convexity, Reciprocity, Experiments
eBay Sellers	Dan Friedman, Garrett Milam, Nirvikar Singh, Steven Anderson	2007	We examine seller tactics in 1177 eBay auctions. The largest volume sellers make rather homogeneous choices; smaller sellers are more heterogeneous. Some tactics, such as starting the auction with a 'Buy it Now' offer, appear to increase revenue. Perhaps due to intense competition, however, the overall impact of most tactics appears to be quite small. The main exception is the use of a secret reserve price, which raises the winning bid conditional on a sale, but reduces the probability of a sale. This can be advantageous, depending on the seller's risk aversion and impatience. ***This paper is forthcoming in International Journal of Electronic Business	eBay Sellers	Internet auctions, Posted prices, Market institutions, Electronic business, eBay, Seller strategy
A Laboratory Investigation of Networked Markets	Alessandra Cassar, Dan Friedman, Patricia Higino Schneider	2007	When contracts are not perfectly enforceable, can interpersonal networks improve market efficiency? We introduce exogenous networks into laboratory markets in which traders can cheat in 'distant' transactions but not in 'local' ones. Traders are anonymous outside their network, but inside it they can build a reputation. We examine network configurations that have the potential to completely overcome market failure and achieve competitive equilibrium (CE) efficiency. Our results fall short of that mark, but the networks do significantly reduce cheating and increase efficiency. Moreover, the theoretical upper bounds correctly predict the main qualitative trade patterns across our four network architectures. The networks support increased international trade volume and reduced domestic volume, and divert transactions of the highest value and lowest cost units from domestic markets to international networks. This paper is forthcoming in Economic Journal	A Laboratory Investigation of Networked Markets	Networks, Laboratory Markets, Market Frictions, Social Capital, Missing Trade Puzzle
Cheating in Markets	Alessandra Cassar, Dan Friedman, Patricia Higino Schneider	2007	We develop a two-market model under three conditions: autarky, frictionless free trade, and free trade with cheating. Under cheating, in cross market trades the buyer can underpay by x% and the seller can deliver x% less than full value. We fully characterize competitive equilibrium with cheating and obtain novel testable predictions on price, volume and surplus. For example, agents with highest value and lowest cost are predicted to trade exclusively in the domestic market, while agents closer to the margin trade only in the cross market and always cheat; the overall volume is higher (!) than in frictionless free trade; and as x% decreases from 100 to 0, domestic prices move non-linearly from autarky levels to the frictionless free trade level. We test many of these predictions in a laboratory experiment with human traders using parameters intended to challenge the theory. The results are generally consistent with the competitive predictions, in the cheating treatments as well as in the autarky and frictionless free trade treatments. We find evidence of price unification, market segmentation, and an overall volume of trade higher (but a cross market volume lower) under cheating than in frictionless free trade. This paper is forthcoming in Journal of Economic Behavior and Organization	Cheating in Markets	Cheating, Missing Trade Puzzle, Frictions, Market Experiment
Market theories evolve, and so do markets	Dan Friedman	2007	Responding to Mirowski's target article, this paper discusses some intellectual currents of 1970s-1990s and offers suggestions on measuring market performance, on including automated agents as market participants, on evolving new market formats, and on dealing with highly differentiated goods. The paper was published in a special issue of the Journal of Economic Behavior & Organization, Vol. 63 (2007) pp. 247-255.	Market theories evolve, and so do markets
Litigation with symmetric bargaining and two-sided incomplete information	Dan Friedman, Donald Wittman	2007	We construct game theoretic foundations for bargaining in the shadow of a trial. Plaintiff and defendant both have noisy signals of a common-value trial judgment and make simultaneous offers to settle. If the offers cross, they settle on the average offer; otherwise, both litigants incur an additional cost and the judgment is imposed at trial. We obtain an essentially unique NE and characterize its conditional trial probabilities and judgments. Some of the results are intuitive, e.g., an increase in trial cost (or a decrease in the range of possible outcomes) reduces the probability of a trial. Other results reverse findings from previous literature. For example, trials are possible even when the defendant's signal indicates a higher potential judgment than the plaintiff's signal, and when trial costs are low, the middling cases (rather than the extreme cases) are more likely to settle. Published in Journal of Law, Economics and Organization, 23:1, 98 – 126 (April 2007).	Litigation with symmetric bargaining and two-sided incomplete information
A laboratory Investigation of Deferral Options	Dan Friedman, Ryan Oprea, Steven Anderson	2007	An irreversible investment opportunity has value $V$ governed by Brownian motion with upward drift and random expiration. Human subjects choose in continuous time when to invest. If she invests before expiration, the subject receives $V - C$: the final value $V$ less a given avoidable cost $C$. The optimal policy is to invest when $V$ first crosses a threshold $V^ = (1+w^)C$, where the option premium $w^$ is a specific function of the Brownian parameters representing drift, volatility and discount (or expiration hazard) rate. We ran 80 periods each for 69 subjects. Subjects in the Low $w^$ treatment on average invested at values quite close to optimum. Subjects in the two Medium treatments and the High $w^*$ invested at values below optimum, but with the predicted ordering, and values approached the optimum by the last block of 20 periods. Behavior was most heterogeneous in the High treatment. Subjects underrespond to differences in both the volatility and expiration hazard parameters. A directional learning model suggests that subjects react reliably to ex-post losses due to early investment, and react much more heterogeneously (and on average more strongly) to missed investment opportunities. Simulations show that this learning process converges on a nearly optimal steady state. This paper is forthcoming in Review of Economic Studies.	A laboratory Investigation of Deferral Options pdf A laboratory Investigation of Deferral Options zip	Real options, Optimal stopping, Laboratory experiment, Fractional factorial design
ITEM Proposal	Dan Friedman	2006	The project description for the ITEM GRANT	ITEM Proposal
Speculative Attacks: A Laboratory Study in Continuous Time	Dan Friedman, Yin-Wong Cheung	2006	We test speculative attack models in a controlled laboratory environment featuring continuous time, size asymmetries, and varying amounts of public information. Attacks succeeded in 233 of 344 possible trading periods. When speculators have symmetric size and access to information: (a) weaker (or more rapidly deteriorating) fundamentals increase the likelihood of successful speculative attacks and hasten their onset, and (b) contrary to some theory, public access to information about either the net speculative position or the fundamentals also enhances success. The presence of a larger speculator further enhances success, and experience with large speculators increases small speculators' response to the public information. However, giving the large speculator increased size or better information does not significantly strengthen his impact. forthcoming, Journal of International Money and Finance.	Speculative Attacks: A Laboratory Study in Continuous Time pdf Speculative Attacks: A Laboratory Study in Continuous Time Zip	Currency Crisis, Speculative Attack, Laboratory Experiment, Coordination Game, Pre-emption, Large Player
Chapters from Handbook of Experimental Economics Results	Changhua Rich, Dan Friedman, Hugh Kelley, Nicole Bouchez, Timothy Cason	2006	Collected here are 4 chapters from the long-awaited Handbook: Equilibrium Convergence, by NB and DF, about learning in games. Learning to Forecast Price, by HK and DF, about forecasting given two continuous signals. A Comparison of Market Institutions, by TC and DF, about the CDA and Call market, and intermediate institutions. The Matching Market, by CR and DF, about a peculiar variant of the Call market. These chapters were written around 1998 but were published only in 2008.	Chapters from Handbook of Experimental Economics Results
Markups in Double Auction Markets	Dan Friedman, Wenjie Zhan	2005	We study the continuous double auction market with simulated traders using various markup rules. A higher markup trades off increased profitability against reduced probability of a transaction. The tradeoff in Nash equilibrium turns out to be remarkably close to the most efficient tradeoff. This may partially explain the mysterious efficiency of double auction markets. This paper appeared in Journal of Economic Dynamics and Control 31:9, 2984-3005 (September 2007)	Markups in Double Auction Markets	Markup, Simulations, Continuous double auction
Searching for the Sunk Cost Fallacy	Bernardo Huberman, Dan Friedman, Garrett Milam, Kai Pommerenke	2005	We isolate in the laboratory factors that encourage and discourage the famous but elusive sunk cost fallacy. Subjects play a computer game in which they decide whether to keep digging for treasure on an island or to sink a cost (which will turn out to be either high or low) to leave for another island. The research hypothesis is that subjects will stay longer on islands that were more costly to find. Eleven treatment variables are considered, including alternative displays, whether the treasure value of an island is shown on arrival or discovered by trial and error, and cost and other parameters. We detect only a small sunk cost effect that seems insensitive to the hypothesized psychological drivers of self-justification and loss aversion. This paper appeared in Experimental Economics 10:1, 79-104 (March 2007)	Searching for the Sunk Cost Fallacy pdf Searching for the Sunk Cost Fallacy zip	Sunk costs, Sunk cost fallacy, Search, Self-justification, Loss aversion
Financial Engineering and Rationality: Experimental Evidence Based on the Monty Hall Problem	Brian Kluger, Dan Friedman	2005	Financial engineering often involves redefining existing financial assets to create new financial products. This paper investigates whether financial engineering can alter the environment so that irrational agents can quickly learn to be rational. The specific environment we investigate is based on the Monty Hall problem, a well-studied choice anomaly. Our results show that, by the end of the experiment, the majority of subjects understand the Monty Hall anomaly. Average valuation of the experimental asset is very close to the expected value based on the true probabilities. forthcoming, Journal of Behavioral Finance.	Financial Engineering and Rationality: Experimental Evidence Based on the Monty Hall Problem
A tractable model of reciprocity and fairness	Dan Friedman, James C. Cox, Steven Gjerstad	2005	We introduce a parametric model of other-regarding preferences in which my emotional state determines the marginal rate of substitution between my own and others' payoffs, and thus my subsequent choices. In turn, my emotional state responds to relative status and to the kindness or unkindness of others' choices. Structural estimations of this model with six existing data sets demonstrate that other-regarding preferences depend on status, reciprocity, and perceived property rights. Published in Games and Economic Behavior 59:1, 17-45 (April 2007).	A tractable model of reciprocity and fairness
Cheating in Markets: A Methodological Exploration	Dan Friedman	2004	In the 1970s, experimental economics split from social psychology by embracing rational choice and equilibrium methods. Behavioral economics has recently narrowed the divide, to the dismay of some. The present paper argues that evolutionary dynamics provides a framework which unifies the best features of social psychology with equilibrium and rational choice. Ongoing research in cheating in markets illustrates the main points. A new equilibrium model provides distinctive testable predictions under three regimes: autarky, frictionless free trade, and anonymous foreign trade with opportunities to cheat. The predictions organize quite well the data collected so far. Later phases of the project will allow trader networks to evolve, altering the market institution and perhaps affecting preferences. Thus the major forces recognized by social psychologists can be combined with a rationality and equilibrium to study how markets respond to the risk of cheating. This paper appeared as a chapter in S. Oda, editor, Developments on Experimental Economics, Springer Lecture Notes in Economics and Mathematical Sciences #590, July 2007.	Cheating in Markets: A Methodological Exploration
Internet Congestion: A Lab Experiment	Bernardo Huberman, Dan Friedman	2004	Human players and automated players (bots) interact in real time in a congested network. A player's revenue is proportional to the number of successful ''downloads'' and his cost is proportional to his total waiting time. Congestion arises because waiting time is an increasing random function of the number of uncompleted download attempts by all players. Surprisingly, some human players earn considerably higher profits than bots. Bots are better able to exploit periods of excess capacity, but they create endogenous trends in congestion that human players are better able to exploit. Nash equilibrium does a good job of predicting the impact of network capacity and noise amplitude. Overall efficiency is quite low, however, and players overdissipate potential rents, i.e., earn lower profits than in Nash equilibrium. Published in in R. Zwick, ed., Experimental Business Research, Vol II, New York: Kluwer, October 2005. A shorter version of the same article, aimed at computer scientists, appeared in Proceedings of the ACM SIGCOMM 2004 Workshops, ACM Press, NY (ISBN: 1-58113-942-X), 177-182.	Internet Congestion: A Lab Experiment
Negative Reciprocity: The Coevolution of Memes and Genes	Dan Friedman, Nirvikar Singh	2004	A preference for negative reciprocity is an important part of the human emotional repertoire. We model its role in sustaining cooperative behavior but highlight an intrinsic free-rider problem: the fitness benefits of negative reciprocity are dispersed throughout the entire group, while the fitness costs are borne personally. Evolutionary forces tend to unravel people's willingness to bear the personal cost of punishing culprits. In our model, the countervailing force that sustains negative reciprocity is a meme consisting of a group norm together with low-powered (and low-cost) group enforcement of the norm. The main result is that such memes coevolve with personal tastes and capacities so as to produce the optimal level of negative reciprocity. A slightly revised version of this paper appeared in Evolution and Human Behavior, 25(3), 155-173 (May 2004).	Negative Reciprocity: The Coevolution of Memes and Genes	Altruism, reciprocity, negative reciprocity, coevolution
Vengefulness Evolves in Small Groups	Dan Friedman, Nirvikar Singh	2004	We discuss how small group interactions overcome evolutionary problems that might otherwise erode vengefulness as a preference trait. The basic viability problem is that the fitness benefits of vengeance often do not cover its personal cost. Even when a sufficiently high level of vengefulness brings increased fitness, at lower levels, vengefulness has a negative fitness gradient. This leads to the threshold problem: how can vengefulness become established in the first place? If it somehow becomes established at a high level, vengefulness creates an attractive niche for cheap imitators, those who look like highly vengeful types but do not bear the costs. This is the mimicry problem, and unchecked it could eliminate vengeful traits. We show how within-group social norms can solve these problems even when encounters with outsiders are also important. This paper appeared as a chapter in the Werner Guth festschrift: S. Huck, ed., Advances in Understanding Strategic Behavior, NY: Palgrave Macmillan, 2004.	Vengefulness Evolves in Small Groups	Second order free riding, social norms, reciprocity, vengeance
Vengefulness evolves in small groups	Dan Friedman	2004	We discuss how small group interactions overcome evolutionary problems that might otherwise erode vengefulness as a preference trait. The basic viability problem is that the fitness benefits of vengeance often do not cover its personal cost. Even when a sufficiently high level of vengefulness brings increased fitness, at lower levels, vengefulness has a negative fitness gradient. This leads to the threshold problem: how can vengefulness become established in the first place? If it somehow becomes established at a high level, vengefulness creates an attractive niche for cheap imitators, those who look like highly vengeful types but do not bear the costs. This is the mimicry problem, and unchecked it could eliminate vengeful traits. We show how within-group social norms can solve these problems even when encounters with outsiders are also important. A lightly revised version of this paper appeared in S. Huck, ed., Advances in Understanding Strategic Behavior, NY: Palgrave Macmillan, 2004.	Vengefulness evolves in small groups
Asset Market Experiments	Dan Friedman, Hugh Kelley	2003	This 2003 article for the Encyclopedia of Cognitive Science discusses laboratory evidence connecting cognitive biases to asset market prices.	Asset Market Experiments	Cognitive biases, asset markets
Dynamics of Price Dispersion	Dan Friedman, Florian Wagener, Timothy Cason	2003	Hypotheses on the dynamics of dispersed prices are extracted from computer simulations, as well as traditional and recent theory. The hypotheses are tested on existing laboratory data. As predicted in some variations of the Edgeworth hypothesis, the laboratory data exhibit a significant cycle. Relative to the unique stationary distribution, the empirical distribution of posted prices has excess mass in an interval that moves downward over time until it approaches the lower boundary of the stationary distribution. Then the excess mass jumps upward and the downward cycle resumes. The amplitude of the cycle seems fairly constant over the longer experimental sessions. Of the simulations we consider, the one closest to Edgeworth's 1925 account, a hybrid of gradient dynamics and logit dynamics, seems to best reproduce the observed dynamics. Published in Journal of Economic Dynamics and Control, 29(4), 801-822 (April 2005).	Dynamics of Price Dispersion pdfDynamics of Price Dispersion zip
Evolution and Negative Reciprocity	Dan Friedman, Nirvikar Singh	2001	We offer a theoretical explanation of negative reciprocity or vengeance, the human desire to harm those who have harmed us. Our model shows how negative reciprocity can be sustained by the coevolution of genes that determine the capacity for vengeance and group memes (e.g., social norms) that regulate its expression. The model begins with a standard free rider game that captures, simply and directly, a personal cost incurred to reap social gains. The model shows that a taste for vengeance realigns incentives and supports a socially efficient equilibrium, but that by itself the taste for vengeance is not evolutionarily viable. We then show how groups of individuals can use low-power sanctions (or simply status changes) to enforce a particular norm on the proper degree of vengeance. The main result is that actual behavior typically will fall short of the norm, but selection across groups will adjust the norm so that actual behavior maximizes the fitness of group members. A lightly edited version of this paper appeared in Y. Aruka, ed., Evolutionary Controversies in Economics, Springer, 2001.	Evolution and Negative Reciprocity	Altruism, reciprocity, negative reciprocity, coevolution
Calendar Auction White Paper	Alessandra Cassar, Dan Friedman	2001	White paper written for defunct startup company One Day Free. The paper describes their proposed Dynamic Price Calendar Auction[TM], a new electronic format that combines features of traditional descending (Dutch) and ascending (English) auctions. It allows sellers to auction multiple units of a good or service, and offers buyers the immediacy of posted offer markets together with full price transparency.	Calendar Auction White Paper	Auctions, e-commerce
Contagion of Financial Crises under Local and Global Networks	Alessandra Cassar, Nigel Duffy	2001	As the world economy becomes increasingly global, will the financial sector become more stable or fragile? In this paper we study how the pattern of relations linking financial institutions - the network - affect the diffusion of a financial crisis. We analyze two such networks with a computational model: the local network, in which each bank is allowed to interact only with the most immediate neighbors, and the global network, in which each bank is allowed to interact with banks located anywhere in the system. We find that the network matters both for the amount of illiquidity in the system and for the spread of bankruptcy. When interactions are local, bankruptcy spreads slower but illiquidity hits harder. When interactions are global, bankruptcy spreads faster, but illiquidity presents fewer problems. We explain our results applying tools from graph theory. We conclude that a global system, in which financial institutions are not restricted to interact only with close neighbors, is more efficient in collecting and allocating funds, but is more vulnerable to contagion of bankruptcy crises.	Contagion of Financial Crises under Local and Global Networks
ZippedData for Customer Market Experiments	Dan Friedman, Florian Wagener, Garrett Milam, Timothy Cason	2001	Data below is attached to many papers in the project, "Customer Markets // 1997 - 2001 // SBR 9617917".	ZippedData for Customer Market Experiments
Bargaining versus Posted Price Competition in Customer Markets	Dan Friedman, Garrett Milam, Timothy Cason	2000	We compare posted price and bilateral bargaining (or haggle) market institutions in 12 pairs of laboratory markets. Each market runs 50-75 periods in a customer market environment, where buyers incur a cost to switch sellers. Costs evolve following a random walk process. Coasian and New Institutionalist traditions provide competing conjectures on relative market performance. We find that efficiency is lower, sellers price higher, and prices are stickier under haggle than under posted offer. Published in International Journal of Industrial Organization, 21(2), 223-251 (February 2003).	Bargaining versus Posted Price Competition in Customer Markets zip Bargaining versus Posted Price Competition in Customer Markets pdf
Towards Evolutionary Game Models of Financial Markets	Dan Friedman	2000	Evolutionary game models analyze strategic interaction over time; equilibrium emerges (or fails to emerge) as players/traders adjust their actions in response to the payoffs they earn. This paper sketches some early and some recent evolutionary game models that contain ideas useful in modeling financial markets. It spotlights recent work on adaptive landscapes. In an extended example, the distribution of player/trader behavior obeys a variant of Burgers' partial differential equation, and solutions involve travelling shock waves. It is conjectured that financial market crashes might insightfully be modeled in a similar fashion. A slightly modified version appears in Quantitative Finance 1:1 (Jan 2001)pp. 177-185. Reprinted in Beyond Equilibrium and Efficiency, D. Farmer and J. Geanokoplos (eds), Oxford University Press, 2002.	Towards Evolutionary Game Models of Financial Markets
Laboratory Study of Customer Markets	Dan Friedman, Timothy Cason	2000	In our laboratory customer markets, sellers post price and buyers incur cost (controlled at zero, low and high values) when they switch to a new seller. Sellers' production costs follow various random walks in 28 sessions, each with 50-100 trading periods. We find that prices are sticky, and sellers absorb almost half of their cost shocks. Sellers price about 10 percent higher when buyers face either high or low switch costs, and trading efficiency is slightly impaired. Experienced buyers switch about 10 percent of the time with either high or low switch costs. Buyers switch more often when they face a higher posted price, have a lower valuation for the good, face lower switch costs, have more time remaining, and have more favorable information on alternative prices. Sellers price higher when they have more attached buyers, when buyers have less information on rivals' prices, when rivals post higher prices, and when less time remains.	Laboratory Study of Customer Markets
Buyer Search and Price Dispersion: A Laboratory Study	Dan Friedman, Timothy Cason	2000	Published in JET. Posted offer markets with costly buyer search are investigated in 18 laboratory sessions. Each period sellers simultaneously post prices. Then each buyer costlessly observes one or (with probability 1-q) two of the posted prices, and either accepts an observed price, drops out, or pays a cost to search again that period. The sessions vary q, the search cost, the number of sellers, and the number and kind of buyers. Observed transaction prices conform fairly closely to theory (specific unified prices for q=0 and 1 and specific distributions of dispersed prices for q=1/3 and 2/3) when there are more sellers and when there are more buyers (especially robot buyers). With smaller numbers of traders we often see conscious parallelism in pricing behavior.	Buyer Search and Price Dispersion: A Laboratory Study pdf Buyer Search and Price Dispersion: A Laboratory Study zip
On the Viability of Vengeance	Dan Friedman, Nirvikar Singh	1999	Using a simple symmetric game to illustrate, we point out shortcomings in previous theoretical accounts of how the human vengeance motive survives despite a free rider problem. We offer a new theoretical explanation involving the coevolution of genes that determine the capacity for vengeance and memes that regulate its expression. The main result, illustrated in a simple parametric example, is that coevolution in a fixed environment circumvents the free rider problem and that the prevailing vengeance level will efficiently serve groups of individuals.	On the Viability of Vengeance
Evolutionary Economics Goes Mainstream: A Review of the Theory of Learning in Games	Dan Friedman	1999	Evolutionary economics in recent decades has defined itself as a radical al- ternative to mainstream economics. The mainstream studies simple interac- tions of unboundedly clever agents, and assumes that the agents instanta- neously achieve mutual consistency, as in competitive equilibrium or Nash equilibrium. The intent is to illuminate the fundamental role of tastes and technology in determining economic outcomes, and to reveal unsuspected consequences of policies that alter private opportunities and incentives (e.g., Mas-Colell, Whinston and Green, 1995).	Evolutionary Economics Goes Mainstream: A Review of the Theory of Learning in Games
Customer Search and Market Power: Some Laboratory Evidence	Dan Friedman, Timothy Cason	1999	Posted offer markets with costly buyer search are investigated in 18 laboratory sessions. Each period sellers simultaneously post prices. Then each buyer costlessly observes one or two of the posted prices and either accepts an observed price, drops out, or pays a cost to search again that period. The sessions vary the number of observed prices (one or two), the search cost, and the number and kind of buyers. When there are more buyers (especially robot buyers), observed transaction prices conform remarkably closely to theory (competitive Bertrand prices when buyers observe two prices and monopoly Diamond prices when buyers observe only one price). With human subject buyers we observe less extreme prices, but outcomes are closer to theory than outcomes in previous laboratory experiments with similar environments.	Customer Search and Market Power: Some Laboratory Evidence
Learning in a Laboratory Market with Random Supply and Demand	Dan Friedman, Timothy Cason	1999	We propose a quantitative version of directional learning in a call market. Buyers (resp. sellers) adjust markdown (or markup) relative to true value (or cost) towards the ex-post optimum after each period. The model explains a considerable portion of behavior in a relevant laboratory experiment.	Learning in a Laboratory Market with Random Supply and Demand	Laboratory Experiment, Call market, Auction, Bidding
Learning to Forecast Price	Dan Friedman, Hugh Kelley	1999	We study human learning in a individual choice laboratory task called Or- ange Juice Futures price forecasting (OJF), in which subjects must implic- itly learn the coefficients of two independent variables in a stationary linear stochastic process. The 99 subjects each forecast in 480 trials with feedback after each trial. Learning is tracked for each subject by fitting the forecasts to the independent variables in a rolling regression. Results include: (1) learning is fairly consistent in that coecient estimates for most subjects converge closely to the objective values, but there is a mild general tendency toward over-response. (2) Typically learning is noticeable slower than the Marcet-Sargent ideal. Among the more striking treatment effects are a gen- eral tendency towards (3) over-response with high background noise and (4) under-response with asymmetric coefficients.	Learning to Forecast Price
Matching Market Institution: A Laboratory Investigation	Changhua Rich, Dan Friedman	1999	The matching market (MM) trading institution matches the buyer with the highest bid to the willing seller with the highest ask, the second highest bidder to the second highest remaining willing seller, etc., until no seller remains who is willing to transact at any remaining buyer's bid. Our laboratory study shows that, compared to uniform pricing, the MM institution results in lower efficiency, more variable trading volume, and less value revelation.	Matching Market Institution: A Laboratory Investigation	Call market, matching market
A Comparison of Learning and Replicator Dynamics Using Laboratory Data	Dan Friedman, Yin-Wong Cheung	1998	We compare the explanatory power of replicator dynamics with belief learning dynamics using laboratory data in a variety of games. Overall, and especially in two-population games, the belief learning model fits the data better.	A Comparison of Learning and Replicator Dynamics Using Laboratory Data	Belief learning, Experimental data, Mixed Nash equilibrium, Replicator dynamics
On economic applications of evolutionary games	Dan Friedman	1998	Evolutionary games have considerable unrealized potential for modeling substantive economic issues. They promise richer predictions than orthodox game theoretic models but often require more extensive specification. This article exposits the specification of evolutionary game models and classifies their asymptotic behavior in one and two dimensions.	On economic applications of evolutionary games	Evolutionary games, Adjustment dynamics, ESS, Evolutionary equilibrium
Broadening the Tests of Learning Models	Dan Friedman, Dominic Massaro, Hugh Kelley	1998	For many years psychological studies of the learning process have used a simulated medical diagnosis task in which symptom configurations are probabilistically related to diseases. Participants are given a set of symptoms and asked to indicate which disease is present, and feedback is given on each trial. We enrich this standard laboratory task in four dif- ferent ways. First, the symptoms have four possible values (low, medium low, medium high, and high) rather than just two. Second, symptom configurations are generated from an expanded factorial design rather than a simple factorial design. Third, subjects are asked to make a con- tinuous judgment indicating their confidence in the diagnosis, rather than simply a binary judgment. Fourth, cumulated performance scores, payoffs, and the availability of a historical summary of the outcomes are varied in order to assess how these treatments modulate performance. These enrichments provide a broader data set and more challenging tests of the models. Using 123 subjects each in 480 trials, we compare five existing learning models plus several variants, including the well-known Bayesian, fuzzy logic, connectionist, exemplar, and ALCOVE models. We find that the subjects do learn to distinguish the symptom configurations, that subjects are quite heterogeneous in their response to the task, and that only a small part of the variation across subjects arises from the differences in treatments. The most striking finding is that the model that best predicts subjects' behavior is a simple Bayesian model with a single fitted parameter for prior precision to capture individual differences. We use rolling regression techniques to elucidate the behavior of this model over time and find some evidence of over-response to current stimuli.	Broadening the Tests of Learning Models
Monty Hall's Three Doors: Construction and Deconstruction of a Choice Anomaly	Dan Friedman	1998	Sometimes people make decisions that seem inconsistent with rational choice theory. We have a choice anomaly when such decisions are systematic and well documented. From a few isolated examples such as the Maurice Allais (1953) paradox and the probability matching puzzle of William K. Estes (1954), the set of anomalies expanded dramatically following the work of Daniel Kahneman and Amos Tversky (e.g., 1979).	Monty Hall's Three Doors: Construction and Deconstruction of a Choice Anomaly
Understanding Variability in Binary and Continuous Choice	Dan Friedman, Dominic Massaro	1998	Excessive variability in binary choice (categorical judgment) can take the form of probability matching rather than the normatively correct behavior of deterministically choosing the more likely alternative. Excessive variability in continuous choice (judgment rating) can take the form of underconfidence, understating the probability of highly likely events and overstating the probability of very unlikely events. We investigate the origins of choice variability in terms of noise prior to decision (at the evidence stage) and at the decision stage.	Understanding Variability in Binary and Continuous Choice
Motivation and Coordination Games; Experiencing Organizational Dynamics	Nicole Bouchez	1997	The motivation and coordination games covered here are used in the Managerial Economics class that is taught at UC Santa Cruz. Both games provide students with a hands on way to experience the differences between problems of motivation and coordination, a distinction which many under-graduates do not immediately understand. Both games are conducted in class and they have a short follow-up assignment that is announced after the game is finished. This assignment is meant to help the students understand what they have been doing and why the two games are different. In the coordination game, the students have a common interest (the equilibria are Pareto ranked, and one is efficient). The problem is aligning expectations (and actions). Generally, the students initially settle on an inefficient equilibrium. Direct communication between students allows students to achieve efficiency and move to the Pareto efficient equilibrium without the need for binding commitments. In contrast, in the motivation game, the players have a personal interest diametrically opposed to the common interest (a sort of multilateral prisoner’s dilemma). By playing the game, students come to realize how difficult it can be to achieve cooperation when the benefits to defection are great. Even in the classroom, it seems impossible to get the Pareto optimal equilibrium without some kind of binding agreement.
Price Formation in Single Call Markets	Dan Friedman, Timothy Cason	1997	This paper reports a laboratory experiment designed to examine the price formation process in a simple market institution, the single call market. The experiment features random values and costs each period, so each period generates a new price formation observation. Other design features are intended to enhance the predictive power of the Bayesian Nash equilibrium (BNE) theory developed recently for this trading institution. We find that the data support several qualitative implications of the BNE, but that subjects' bid and ask behavior is not as responsive to changes in the pricing rule as the BNE predictions. Bids and asks tend to reveal more of the underlying values and costs than predicted, particularly when subjects are experienced. Nevertheless, observed trading efficiency falls below the BNE prediction. The results offer more support for the BNE when subjects compete against Nash "robot" opponents. A simple learning model accounts for several of the deviations from BNE.	Price Formation in Single Call Markets
Evolving Landscapes for Population Games	Dan Friedman, Joel Yellin	1997	We consider population games where the possible actions of each player are labeled by a real number that ranges over a finite interval. The adjustment dynamics of such games can be visualized in terms of the ``landscape'' - the graph of the payoff (or fitness) function. A leading example is gradient dynamics, in which the speed with which a player changes action is proportional to the gradient (or slope) of the landscape at his current action. The time behavior of the action distribution in gradient dynamics is described by a class of nonlinear partial differential equations. Cases are exhibited in which the distribution of actions develops compressive and rarefaction shock waves. We discuss connections to the learning in games literature and to replicator and other monotone (or order compatible) dynamics. Applications are suggested in economics and population biology.	Evolving Landscapes for Population Games
An Empirical Analysis of Price Formation in Double Auction Markets	Dan Friedman, Timothy Cason	1997	This chapter from Friedman and Rust (1996) compares the explanatory power of three models of price formation in DA markets. Bid-ask sequences in the laboratory data are best explained in the Bayesian Game against Nature model, and the negative autocorrelation in transaction price changes is best explained by the Zero Intelligence model.	An Empirical Analysis of Price Formation in Double Auction Markets	Price formation, BGAN, WGDA, ZI
Individual Learning in Normal Form Games: Some Laboratory Results	Dan Friedman, Yin-Wong Cheung	1997	We propose and test a simple belief learning model. We find considerable heterogeneity across individual players; some players are well described by ficti- tious play (long memory)learning, other players by Cournot (short memory)learning, and some players are in between. Representative agent versions of the model fit significantly less well and sometimes point to incorrect inferences. The model tracks players' behavior well across a variety of payoff matrices and information conditions.	Individual Learning in Normal Form Games: Some Laboratory Results
Learning Liability Rules	Aaron Braskin, Dan Friedman, Donald Wittman	1997	We conduct experiments regarding the equilibrium and convergence properties of three different liability rules: negligence with contributory negligence, comparative negligence, and no-fault. Our experimental results show that, in comparison to contributory negligence, comparative negligence promotes a faster and more reliable convergence to the efficient equilibrium. Furthermore, as predicted by theory, the no-fault equilibrium yields suboptimal amounts of effort. Along the way we also test various hypotheses regarding learning and other adjustment dynamics. Thus our article extends the traditional static notion of institutional choice—liability rules with efficient equilibria are chosen—to a more dynamic perspective—rules that rapidly achieve efficient equilibria are chosen.	Learning Liability Rules
Learning Liability Rules	Dan Friedman, Donald Wittman, Stephanie Crevier	1997	We conduct experiments regarding the equilibrium and convergence properties of three different liability rules: negligence with contributory negligence, comparative negligence, and no-fault. Our experimental results show that, in comparison to contributory negligence, comparative negligence promotes a faster and more reliable convergence to the efficient equilibrium. Furthermore, as predicted by theory, the no-fault equilibrium yields suboptimal amounts of effort. Along the way we also test various hypotheses regarding learning and other adjustment dynamics. Thus our article extends the traditional static notion of institutional choice—liability rules with efficient equilibria are chosen—to a more dynamic perspective—rules that rapidly achieve efficient equilibria are chosen	Learning Liability Rules
International Trade and the Internal Organization of Firms: An evolutionary approach	Dan Friedman, K.C. Fung	1996	Masahiko Aoki and others have distinguished two alternative modes for a firm’s internal organization. We argue that the profitability of each mode depends on the distribution of firms across modes and on the general economic environment. We characterize the evolutionary equilibria in both a parametric and a general model, and argue that corner equilibria predominate. We analyze the effects of trade between the two countries in (a) outputs only and (b) inputs (factors) as well as outputs. Our most striking conclusion is that in case (b) a less efficient mode can displace a more efficient mode when trade barriers are sufficiently low.	International Trade and the Internal Organization of Firms: An evolutionary approach	Japanese corporation, Evolutionary games, Internal organization of firms, Factor movement
Price formation in double auction markets	Dan Friedman, Timothy Cason	1996	This paper reports 14 laboratory experiments that examine existing theories of the price formation process in the continuous double auction. The experiments feature random values and costs, and therefore a new price formation observation each period. We find that efficiency is high and rises with experience in this environment. We also find that trades with greater exchange surplus tend to occur earlier in the period, that increased trader experience reduces an anomalous intertemporal arbitrage opportunity observed previously, and that only when traders are very experienced does exchange surplus accrue disproportionately to the side of the market with a smaller number of traders.	Price formation in double auction markets
The Factory System	Dan Friedman	1996	Rough notes for modelling production in extensive form	The Factory System
An Empirical Analysis of Price Formation in Double Auction Markets	Dan Friedman, Timothy Cason	1996	Chapter 9 in Friedman and Rust 1993 volume on the Double Auction Market. This chapter compares the ability of three theoretical models -- Wilson's Waiting Game/ Dutch Auction model, Friedman's Bayesian Game Against Nature model, and Gode and Sunder's Zero Intelligence model -- to account for empirical regularities in lab data. The second model does the best job of predicting bid/ask sequences, and the third model correctly predicts the negative serial correlation in prices. All three models have the same predictions on efficiency and transactions order, and those predictions organize the data reasonably well.	An Empirical Analysis of Price Formation in Double Auction Markets	CDA, price formation
Double Auction Markets book Ch 1	Dan Friedman	1996	Survey of theoretical and laboratory studies of the double auction market institution. Chapter 1 in the 1993 book by D. Friedman and J. Rust. The classification of market institutions in Table 1 and Figure 1 may be helpful.	Double Auction Markets book Ch 1	DAsurvey
Equilibrium in Evolutionary Games: Some Experimental Results	Dan Friedman	1996	Evolutionary game theory informs the design and analysis of 26 experimental sessions using normal form games with 6 - 24 players. The state typically converges to the subset of Nash equilibria called evolutionary equilibria, especially under conditions of mean matching and history. Mixed strategy equilibria are explained better by 'purification' strategies than by homogenous independent individual randomisation. The risk dominance criterion fares poorly in some coordination game environments. With small player populations and large gains to cooperative behaviour, some players apparently attempt to influence other players' actions, contrary to a key theoretical assumption.	Equilibrium in Evolutionary Games: Some Experimental Results
ZippedData for Price Formation and Learning Experiments	Dan Friedman, Joseph Ostroy, Timothy Cason	1996	Attached if data associated with project: "Price Formation and Learning".
Price formation in double auction markets	Dan Friedman	1995	This paper reports 14 laboratory experiments that examine existing theories of the price formation process in the continuous double auction. The experiments feature random values and costs, and therefore a new price formation observation each period. We find that efficiency is high and rises with experience in this environment. We also find that trades with greater exchange surplus tend to occur earlier in the period, that increased trader experience reduces an anomalous intertemporal arbitrage opportunity observed previously, and that only when traders are very experienced does exchange surplus accrue disproportionately to the side of the market with a smaller number of traders.	Price formation in double auction markets
Why voters vote for incumbents but against incumbency: A rational choice explanation	Dan Friedman, Donald Wittman	1995	In recent elections, voters supported initiatives to limit the number of terms that their representatives may serve, yet at the same time, overwhelmingly re-elected their incumbents. We provide a theoretical explanation for this and other puzzles associated with voting on term limitations. The pattern of voting on term limits can be explained by the desire to redistribute power from one party to another, from one branch of government to another, and from districts with long-term incumbents to districts whose representatives have served only for a short time span. We test these hypotheses by looking at voting patters on California Proposition 140 and the vote on the 22nd Amendment with generally positive results.	Why voters vote for incumbents but against incumbency: A rational choice explanation	Term limits; Political redistribution; Rational voter
A Comparison of Learning Models	Dan Friedman, Dominic Massaro	1995	We investigate learning in a probabilistic task, called "medical diagnosis." On each trial, a subject is presented with a stimulus configuration indicating the value of four medical symptoms. The subject responds by guessing which of two diseases is present and is then given feedback about which disease was actually present. The feedback is determined according to fixed conditional probabilities unknown to the subject. We test a normative Bayesian model as well as simple variants of well-known psychological models including the Fuzzy Logical Model of Perception, an Exemplar model, a two-layer Connectionist model and an ALCOVE model. Both the asymptotic predictions of these models (i.e., predictions regarding behavior after it has stabilized and learning is complete) and predictions of trial-by-trial changes in behavior are tested. The models are tested against existing data from Estes et al. (1989, Journal of Experimental Psychology: Learning, Memory, & Cognition,15, 556-571) and new data from medical diagnosis tasks that include not only asymmetric but also symmetric base rates. Learning was observed in all cases in that subjects tended to match the objective probabilities of the symptom configurations more closely in later trials. All of the descriptive models give a more accurate account of performance than the normative Bayesian model. Relative to a benchmark measure, however, none of these models does an especially good job of characterizing asymptotic performance or the learning process. We suggest that future experiments should address individual performance, rather than group learning curves.	A Comparison of Learning Models
Competitivity in Auction Markets: An Experimental and Theoretical Investigation	Dan Friedman, Joseph Ostroy	1995	We report successive rounds of theory and laboratory experiment investigationg price-taking behaviour and market efficiency. We focus on the impact of structural parameters as well as trading institution. the structural parameters involve non-competitive supply and demand, and a new odd-lot trading procedure for divisible goods. We present and justify an as-if complete information theory which explains the competitive outcomes and which correctly predicts highly non-competitive outcomes in CHQ markets.	Competitivity in Auction Markets: An Experimental and Theoretical Investigation
Privileged Traders and Asset Market Efficiency: A Laboratory Study	Dan Friedman	1993	The 39 experiments reported here examine the impact on trading profits and on market performance of awarding special trading privileges to some traders and not others. In call market experiments, the last-mover and orderflow access privileges are both modestly prof? itable and neither impairs market performance. In continuous market experiments, quicker access to orderflow information is quite profitable and more detailed access is possibly prof? itable; both privileges seem to enhance market performance slightly. By contrast, privileged marketmaking is extremely profitable and greatly impairs market performance.	Privileged Traders and Asset Market Efficiency: A Laboratory Study
How trading institutions affect financial market performance: Some laboratory evidence	Dan Friedman	1993	The effects of trading institutions on market efficiency and trading volume are examined. The trading institutions are computerized versions of continuous double auction and "clearinghouse" markets. Traders are experienced, profit-motivated undergraduates. The traded good is a financial asset whose monetary value is state- and trader type-contingent. Traders possess asymmetric private information on asset value. The results show that clearinghouse markets are as informationally efficient as double auction markets and almost as allocationally efficient; the double auction encourages greater trading volume but the clearinghouse provides greater depth; public orderflow information enhances double auction performance but impairs clearinghouse performance.	How trading institutions affect financial market performance: Some laboratory evidence
On evolution and learning in games	Dan Friedman	1993
ZippedData for Evolutionary Game Experiments	Dan Friedman, K.C. Fung, Nirvikar Singh, Yin-Wong Cheung	1993	Attached is data associated with "Evolutionary Game Experiments" projects.	ZippedData for Evolutionary Game Experiments
INEFFICIENT INFORMATION AGGREGATION AS A SOURCE OF ASSET PRICE BUBBLES	Dan Friedman	1992	This paper presents a new theory of bubbles, or discrepancies between the market clearing price and the fundamental value of an asset. In our setting, Bayesian traders, oriented towards long-term gains, receive private information (‘news’) and also make inferences from noisy price signals. Price exhibits higher variance than fundamental value (the latter defined as fully-aggregated expected value) especially when news is informative but infrequent. The corresponding bubbles are self-limiting but may exhibit momentum and overshooting. A parametric example, involving the exponential/gamma conjugate families, is provided.	INEFFICIENT INFORMATION AGGREGATION AS A SOURCE OF ASSET PRICE BUBBLES	bubbles
How Trading Institutions Affect Financial Market Performance: Some Laboratory Evidence	Dan Friedman	1992	The effects of trading institutions on market efficiency and trading volume are examined. The trading institutions are computerized versions of continuous double auction and "clearinghouse" markets. Traders are experienced, profit-motivated undergraduates. The traded good is a financial asset whose monetary value is state-and trader type-contingent. Traders possess asymmetric private information on asset value. The results show that clearinghouse markets are as infomationally efficient as double auction markets and almost as allocationally efficient; the double auction encourages greater trading volume but the clearinghouse provides greater depth; public orderflow information enhances double auction performance but impairs clearinghouse performance.
The Market Value of Information: Some Experimental Results	Thomas Copeland	1992	We examine the price and allocation of purchased information and of the underlying asset in eight double-auction asset market experiments. Observed outcomes support fully revealing rational expectations in simple environments in which uninformed traders can easily infer the private information of informed traders but support nonrevealing rational expectations in more complex environments. The private value of information is positive in the more complex (noisy) environments, but competition forces the information prices to its Nash equilibrium value, and the net gain by purchasers is approximately zero.	The Market Value of Information: Some Experimental Results
Evolutionary Games in Economics	Dan Friedman	1991	Evolutionary games are introduced as models for repeated anonymous strategic interaction. The basic idea is that actions (or behaviors) which are more fit, given the current distribution of behaviors, tend over time to displace less fit behaviors. Simple numerical examples motivate the key concepts of fitness function and compatible dynam- ics, and illustrate the relation to previous biological models. Cone fields are introduced to characterize the continuous-time dynamical processes compatible with a given fitness function. The analysis focuses on dynamic steady state equilibria and their relation to the static equilibria known as NE (Nash equilibrium) and ESS (evolutionary stable state). For large classes of dynamics it is shown that all stable dynamic steady states are NE and that all NE are dynamic steady states. The biologists' ESS condition is less closely related to the dynamic equilibria. The paper concludes with a brief survey of economic applications. published in Econometrica (1991): 637-666.	Evolutionary Games in Economics
Partial Revelation of Information in Experimental Asset Markets	Dan Friedman, Thomas Copeland	1991	We develop a model of market efficiency assuming private information is partially revealed to uninformed traders via the behavior of those who are informed. This partial revelation of information (PRE) model is tested in fourteen computerized double auction laboratory markets. It explains the market value and allocation of purchased information, and asset allocations, better than either a fully revealing information model (FRE strong-form efficiency) or a nonrevealing expectations model; but it takes second place to FRE in explaining asset prices. We conjecture that refined versions of PRE may provide insight into "technical analysis" and minibubbles in securities markets.
A Simple Testable Model of Double Auction Markets	Dan Friedman	1991	We propose a model of price formation in Double Auction markets which employs the strong simplifying assumption that agents neglect strategic feedback efforts and regard themselves as playing a Game against Nature. Agents otherwise are strict expected utility maximizers employing Bayesian updating procedures. We prove the optimality of simple ('aggressive reservation price') strategies in our general model and propose a parametric form that yields very detailed and computable predictions of market behavior.	A Simple Testable Model of Double Auction Markets
Common Value and Private Value Experimental Asset Markets with Inside Information	Rod Merys	1990	Rod Merys MS thesis. It examines information aggregation and dissemination in a variety of laboratory asset markets in which some traders have better private information than others.	Common Value and Private Value Experimental Asset Markets with Inside Information
Insider Information in Experimental Markets	Bret Carthew	1990	Bret Carthew's MS thesis. It focuses on the number of insiders (traders with superior private information) and their impact on asset price.	Insider Information in Experimental Markets pdf Insider Information in Experimental Markets zip
Models of Integration Given Multiple Sources of Information	Dan Friedman, Dominic Massaro	1990	Several models of information integration are developed and analyzed within the context of a prototypical pattern-recognition task. The central concerns are whether the models prescribe maximally efficient (optimal) integration and to what extent the models are psychologically valid. Evaluation, integration, and decision processes are specified for each model. Important features are whether evaluation is noisy, whether integration follows Bayes's theorem, and whether decision consists of a criterion rule or a relative goodness rule. Simulations of the models and predictions of the results by the same models are carried out to provide a measure of identifiability or the extent to which the models can be distinguished from one another. The models are also contrasted against empirical results from tasks with 2 and 4 response alternatives and with graded responses.	Models of Integration Given Multiple Sources of Information
The S-Shaped Value Function as a Constrained Optimum	Dan Friedman	1989	This paper derives an S-shaped value function as the optimal allocation of scarce sensitivity. The value function is similar to that used in Prospect Theory, except with no kink at the reference point. As the constraint relaxes, the value function converges to a classic Bernoulli function.	The S-Shaped Value Function as a Constrained Optimum
Producers' Markets	Dan Friedman	1989	A model of oligopoly with sales costs. Producers set prices and incur most transactions costs. The paper shows that non-collusive behavior leads to price leadership by the lowest cost producer. The prevailing price will be somewhat sticky. Essentially, the model provides microfoundations for the kinked demand curve model of imperfect competition.	Producers' Markets
The Effect of Sequential Information Arrival on Asset Prices: An Experimental Study	Dan Friedman, Thomas Copeland	1987	A complete understanding of security markets requires a simultaneous explanation of price behavior, trading volume, portfolio composition (i.e., asset allocation), and bid-ask spreads. In this paper, these variables are observed in a controlled setting--a computerized double auction market, similar to NASDAQ. Our laboratory allows experimental control of information arrival--whether simultaneously or sequentially received, and whether homogeneous or heterogeneous. We compare the price, volume, and share allocations of three market equilibrium models: telepathic rational expectations, which assumes that traders can read each others minds (strong-form market efficiency); ordinary rational expectations, which assumes traders can use (some) market price information, (a type of semi-strong form efficiency); and private information, where traders use no market information. We conclude 1) that stronger-form market models predict equilibrium prices better than weaker-form models, 2) that there were fewer misallocation forecasts in simultaneous information arrival (SIM) environments, 3) that trading volume was significantly higher in SIM environments, 4) and that bid-ask spreads widen significantly when traders are exposed to price uncertainty resulting from information heterogeneity.	The Effect of Sequential Information Arrival on Asset Prices: An Experimental Study
ZippedData for Financial Market Mechanism Experiments	Dan Friedman, Joseph Ostroy	1987	Attached is data associated with "Financial Market Mechanisms" papers.	ZippedData for Financial Market Mechanism Experiments
Two Microdynamic Models of Exchange	Dan Friedman	1986	Two models are presented of real-time exchange and price adjustment for a system of interrelated markets mediated by trade specialists. The first (MBM) features partially decentralized barter exchange in which specialists continuously maintain inventories and periodically adjust prices. A 'correspondence principle' yields existence and efficiency of (steady- state) equilibrium. Local stability follows from a direct argument. The second model (MMM) features fully decentralized money-mediated exchange as well as specialists. Existence, approximate-efficiency, local-stability and asymptotic-neutrality results are derived.	Two Microdynamic Models of Exchange	Money, exchange, dynamics
Spreading Effects in the Term Structure of Foreign Exchange Rates	Dan Friedman	1985	The roles of speculators, arbitrageurs, trader and hedgers in the formation of spot and forward foreign exchange rates are analyzed by means of an explicit partial equilibrium, two currency model with a range of forward maturities. The principal theoretical finding is that there will generally be a time-varying discrepancy between a given forward rate and the market expectation of the corresponding future spot rate. Moreover, this discrepancy does not bear a systematic relationship to risk characteristics of the currencies. Rather, it is attributable to the fact that currencies are storable goods and hence term structure constraints will "spread" the effects of market expectations across maturities. The spreading effect is computed under certain parametric specifications for market participants, and is illustrated numerically in some examples of a single speculator with rational expectations.	Spreading Effects in the Term Structure of Foreign Exchange Rates
Term Structure of FX Rates	Dan Friedman	1985	two-currency partial equilibrium model, featuring speculators, hedgers, arbitrageurs and traders, is constructed to model the simultaneous determination of spot and a range of forward foreign exchange rates together with the term structure of Eurocurrency interest rates. The main result is that forward FX rates are NOT an unbiased reflections of market expectations of future spot rates, even after adjustment for a risk premium. Rather, due to interest arbitrage, the forward rates largely reflect yield curve differences.	Term Structure of FX Rates
On the Efficiency of Experimental Double Auction Markets	Dan Friedman	1984	I propose a theoretical explanation for the surprisingly efficient outcomes typically observed in laboratory experiments with only a handful of buyers and sellers operating in a continuous double auction market. Using the solution concept "no congestion equilibrium,' -- essentially what later would be called renegotiation-proof equilibrium -- I show that Bertrand-like competition on both sides of the market forces transaction prices into a close neighborhood of competitive equilibrium. The article was published in the March 1984 issue of the American Economic Review.	On the Efficiency of Experimental Double Auction Markets	Continuous double auction, price formation
Effective Scoring Rules for Probabilistic Forecasts	Dan Friedman	1983	This paper studies the use of a scoring rule for the elicitation of forecasts in the form of probability distributions and for the subsequent evaluation of such forecasts. Given a metric (distance function) on a space of probability distributions, a scoring rule is said to be effective if the forecaster's expected score is a strictly decreasing function of the distance between the elicited and true distributions. Two simple, well-known rules (the spherical and the quadratic) are shown to be effective with respect to suitable metrics. Examples and a practical application (in Foreign Exchange rate forecasting) are also provided.	Effective Scoring Rules for Probabilistic Forecasts	Forecasting,Theoretical,
Short-run Fluctuations in Foreign Exchange Rates: Evidence from the Data 1973-1979.	Dan Friedman	1982	(published in J. Int. Econ). The paper examines statistical properties of daily changes in exchange rates in major currencies. It finds evidence that leptokurtosis (fat tails) is due mainly to changes in the parameters (e.g., variance) in the underlying data generating process.	Short-run Fluctuations in Foreign Exchange Rates: Evidence from the Data 1973-1979.
Disequilibrium Processes in a Monetary Economy of Pure Exchange	Dan Friedman	1977	Dan's Dissertation. Studies cone fields of price adjustment and allocation adjustment in continuous time in a pure exchange economy. Demonstrates convergence to competitive equilibrium under rather mild conditions.	Disequilibrium Processes in a Monetary Economy of Pure Exchange