In 1974 an article appeared in Science magazine with the dry-sounding title “Judgment Under Uncertainty: Heuristics and Biases” by a pair of psychologists who were not well known outside their discipline of decision theory. In it Amos Tversky and Daniel Kahneman introduced the world to Prospect Theory, which mapped out how humans actually behave when faced with decisions about gains and losses, in contrast to how economists assumed that people behave. Prospect Theory turned Economics on its head by demonstrating through a series of ingenious experiments that people are much more concerned with losses than they are with gains, and that framing a choice from one perspective or the other will result in decisions that are exactly the opposite of each other, even if the outcomes are monetarily the same. Prospect Theory led cognitive psychology in a new direction that began to uncover other human biases in thinking that are probably not learned but are part of our brain’s wiring.

Thinking fast and slow.

50 Years of Image Analysis

We study a contest with multiple (not necessarily equal) prizes. Contestants have private information about an ability parameter that affects their costs of bidding. The contestant with the highest bid wins the first prize, the contestant with the second-highest bid wins the second prize, and so on until all the prizes are allocated. All contestants incur their respective costs of bidding. The contest's designer maximizes the expected sum of bids. Our main results are: 1) We display bidding equlibria for any number of contestants having linear, convex or concave cost functions, and for any distribution of abilities. 2) If the cost functions are linear or concave, then, no matter what the distribution of abilities is, it is optimal for the designer to allocate the entire prize sum to a single ''first'' prize. 3) We give a necessary and sufficient conditions ensuring that several prizes are optimal if contestants have a convex cost function.

The Optimal Allocation of Prizes in Contests

The R package partykit provides a flexible toolkit for learning, representing, summarizing, and visualizing a wide range of tree-structured regression and classification models. The functionality encompasses: (a) basic infrastructure for representing trees (inferred by any algorithm) so that unified print/plot/predict methods are available; (b) dedicated methods for trees with constant fits in the leaves (or terminal nodes) along with suitable coercion functions to create such trees (e.g., by rpart, RWeka, PMML); (c) a reimplementation of conditional inference trees (ctree, originally provided in the party package); (d) an extended reimplementation of model-based recursive partitioning (mob, also originally in party) along with dedicated methods for trees with parametric models in the leaves. Here, a brief overview of the package and its design is given while more detailed discussions of items (a)-(d) are available in vignettes accompanying the package.

/pdf/partykit-a-modular-toolkit-for-recursive-partytioning-in-r-24qoeyflxj.pdf

Partykit: a modular toolkit for recursive partytioning in R

Many economic, political and social environments can be described as contests in which agents exert costly efforts while competing over the distribution of a scarce resource. These environments have been studied using Tullock contests, all-pay auctions and rank-order tournaments. This survey provides a review of experimental research on these three canonical contests. First, we review studies investigating the basic structure of contests, including the contest success function, number of players and prizes, spillovers and externalities, heterogeneity, and incomplete information. Second, we discuss dynamic contests and multi-battle contests. Then we review research on sabotage, feedback, bias, collusion, alliances, and contests between groups, as well as real-effort and field experiments. Finally, we discuss applications of contests to the study of legal systems, political competition, war, conflict avoidance, sales, and charities, and suggest directions for future research.

/pdf/a-survey-of-experimental-research-on-contests-all-pay-1lqd8ahh9f.pdf

A Survey of Experimental Research on Contests, All-Pay Auctions and Tournaments

Many tournaments are plagued by sabotage among competitors. Typically, sabotage is welfare-reducing, but from an individuali?½s perspective an attractive alternative to exerting positive effort. Yet, given its illegal and often immoral nature, sabotage is typically hidden, making it difficult to assess its extent and its victims. Therefore, we use data from Judo World Championships, where a rule change in 2009 basically constituted a natural experiment that introduced one costless opportunity for sabotage. In Judo, competitors can break an opponenti?½s attack in an unsportsmanlike manner; these are seen as acts of sabotage. Based on a unique dataset of 1,422 fights, we find that the rule change in 2009 has led to a large increase in the use of sabotage. Moreover, sabotage is more likely to be employed by relatively less qualified individuals, and to be targeted at more qualified ones. From a survey among spectators, we show that sabotage is welfare-reducing.

Sabotage in tournaments: Evidence from a natural experiment

Arad and Rubinstein (2012a) have designed a novel game to study level-k reasoning experimentally. Just like them, we find that the depth of reasoning is very limited and clearly different from equilibrium play. We show that such behavior is even robust to repetitions, hence there is, at best, little learning. However, under time pressure, behavior is, perhaps coincidentally, closer to equilibrium play. We argue that time pressure evokes intuitive reasoning and reduces the focal attraction of choosing higher (and per se more profitable) numbers in the game.

Level-k reasoning and time pressure in the 11-20 money request game

Many tournaments are plagued by sabotage among competitors. Typically, sabotage is welfare-reducing, but from an individual’s perspective an attractive alternative to exerting positive effort. Yet, given its illegal and often immoral nature, sabotage is typically hidden, making it difficult to assess its extent and its victims. Therefore, we use data from Judo World Championships, where a rule change in 2009 basically constituted a natural experiment that introduced one costless opportunity for sabotage. In Judo, competitors can break an opponent’s attack in an unsportsmanlike manner; these are seen as acts of sabotage. Based on a unique dataset of 1,422 fights, we find that the rule change in 2009 has led to a large increase in the use of sabotage. Moreover, sabotage is more likely to be employed by relatively less qualified individuals, and to be targeted at more qualified ones. From a survey among spectators, we show that sabotage is welfare reducing.

/pdf/sabotage-in-tournaments-evidence-from-a-natural-experiment-55hszefpx9.pdf

Sabotage in Tournaments: Evidence from a Natural Experiment

In laboratory experiments we explore the effects of communication and group decision making on investment behavior and on subjects’ proneness to behavioral biases. Most importantly, we show that communication and group decision making do not impact subjects’ overall proneness to the hot hand fallacy and to the gambler's fallacy. However, groups decide differently than individuals, as they rely significantly less on useless outside advice from “experts” and choose the risk-free option less frequently. Furthermore we document gender differences in investment behavior: groups of two female subjects choose the risk-free investment more often and are marginally more prone to the hot hand fallacy than groups of two male subjects.

https://www.econstor.eu/bitstream/10419/73879/1/2013-04.pdf

Hot hand and gambler's fallacy in teams: Evidence from investment experiments

Rankings are pervasive in the finance industry, yet there is no research how they impact financial professionals? behavior. We run lab-in-the-field experiments with 657 profession- als, lab experiments with 432 students and collect survey evidence from 1,349 respondents to investigate how rank incentives affect investment decisions. We find that both rankings and tournament incentives increase risk-taking among underperforming professionals, but not among students. Rank-driven risk-taking is robust to various experimental settings, including private identity priming and framing, and related to preferences for relative per- formance, which we find to be stronger for professionals than for the general population and other competitive professions.

/pdf/rankings-and-risk-taking-in-the-finance-industry-39gxrajbhq.pdf

Florian Lindner

Papers

Sabotage in tournaments: Evidence from a natural experiment

Level-k reasoning and time pressure in the 11-20 money request game

Sabotage in Tournaments: Evidence from a Natural Experiment

Hot hand and gambler's fallacy in teams: Evidence from investment experiments

Rankings and Risk-Taking in the Finance Industry