Doctoral Dissertation Research in Economics: Belief Formation and Choice in Games: An Experiment

Much of economic analysis is based on the idea that economic agents respond to incentives and that they will increase their effort to understand the consequences of their actions in order to make the right decisions. This research project will use laboratory experiments to test whether increasing the size of reward or punishment (stakes henceforth) while considering how others will react affect the effort one puts into studying the environment before s/he makes the decision. The research will answer the following questions: (i) does the size of stakes affect people's choices and beliefs? (ii) does higher stakes lead to better responses? (iii) do beliefs become more accurate as stakes increase?, and (iv) do these effects depend on how complex the problem is? In spite of the importance of these questions to economic science, economists have not been able to test them because there is a feedback effect among stakes, beliefs, and actions---changing stakes for one person will change their beliefs and actions, accordingly, thus making it impossible to determine how the size of reward or punishment affects effort. The laboratory experiments, which allows the researcher to get around these problems, are designed to allow the researcher to change the size of the reward while allowing people to play the role of decision maker as well as observers. This allows the researcher to study how people form beliefs about others as well as react to changes in stakes at the same time. The results of this research will help improve decision making, especially when interacting with other people, and in the process, increase productivity and economic growth.

An individual facing a decision takes into account possible courses of action as well as what is at stake. In addition, if the outcome of such a decision depends on what others do, a decision maker may spend some time to understand how her own action and those of others interact. This research analyzes the following questions: Do stakes affect choices and belief formation? Do higher stakes lead to higher best-response rates? Do beliefs become more accurate as stakes increase? Do these effects depend on how complex the game is? Current literature does not provide answers to these questions and this research aims to fill this gap. This project test how changing the stakes in a strategic environment affect both the choices of the individual and the beliefs formed on others' likely strategy. A fundamental challenge of testing these hypotheses is that there exists interaction effects among incentives, beliefs, and actions: changing the incentives of one subject will not only affect that particular individual but also on others who will change their behavior. The research project overcomes this issue through an experimental design where subjects act as both players and observers. In the latter, their own payoff changes but they make choices in an environment where choices have already been made by other actors with different incentives. The research design is able to isolate the effect of scaling up the stakes on choices and beliefs from equilibrium. Furthermore, the design will allow the researchers to provide new insights on cross-game comparisons. It also presents a new class of games spanning those requiring multiple steps of iterative deletion of dominated strategies to those without pure-strategy equilibria. This class of games has various desirable properties in terms of their connection to level-k and random utility models. The results of this research will help improve decision making, especially when interacting with other people and in the process increase productivity and economic growth.

This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.