FRAL - Programme franco-allemand en Sciences humaines et sociales

Aversion to Strategic UnceRtainty: Measurement and Policy Implications – ASUR

Aversion to Strategic «UnceRtainty»: Measurement and policy Implications

Strategic uncertainty is the uncertainty that players face with respect to the strategies chosen by other players. While economic theory mostly applies equilibrium concepts that are based on the absence of strategic uncertainty, experiments have indicated that most humans waive a substantial part of their expected payoff in order to avoid that their payoff depends on the decisions by others. This aversion to strategic uncertainty has far-reaching consequences for economic efficiency.

Aim of the project

Our project first aims at developing a method for measuring strategic uncertainty aversion. Our main idea is to elicit the willingness to pay for participating in a game and subjective probabilities for the potential payoffs in this game. The difference between the subjectively expected payoff and the willingness to pay is the amount that a subject is willing to waive for avoiding the respective uncertainty. This defines a premium for strategic uncertainty in a similar vein as the risk premium that measures the difference between a subject’s willingness to pay for participating in a lottery and the expected payoff from that lottery. <br /> <br />Secondly, we want to find out how strategic uncertainty aversion is affected by the characteristics of the game, and how it compares to risk aversion and ambiguity aversion in the classical sense. For this, we want to compare premia for strategic uncertainty in different games with risk premia and ambiguity premia (that are defined in a similar way for lotteries without known probabilities). <br /> <br />Because strategic uncertainty aversion may lead to inefficient outcomes, our third goal is to analyze by which means strategic uncertainty can be reduced. Here, we want to analyze the policy implications of strategic uncertainty aversion. In particular, we will consider applications to monetary economics and financial crises, where central banks and financial market regulators can change the characteristics of the game. We are also interested in how agents may themselves reduce strategic uncertainty by communication and by acquiring information about what the others know. To this aim, we will especially analyze how different communication channels and information affect the strategic uncertainty premium.

In terms of methods, we use experimental economics.

So far, one project conducted by the Franco-German team has been accepted for publication in the Journal of Economic Behavior and Organization. This first paper is a collaboration between C. Cornand and A. Zylbersztejn ON THE French side and M. Bulutay on the German side.
The paper belongs to the third objective of the research program, as it presents an example in which reducing strategic uncertainty can improve economic outcomes. The starting point of the paper is the fact that the rational expectations hypothesis fails to characterize the path to equilibrium after an exogenous shock when actions are strategic complements. Under identical shocks, however, repetition allows adaptive learning, so that inertia in adjustment should fade away with experience. If this finding proves to be robust, inertia in adjustment may be irrelevant among experienced agents. The conjecture in the literature is that inertia would still persist, perhaps indefinitely, in the presence of real-world complications such as nonidentical shocks.
Our contribution consisted in testing the conjecture that the inertia in adjustment is more persistent if the shocks are nonidentical. To this aim, we run a series of laboratory experiments in October 2019.
For both identical and nonidentical shocks, we find persistent inertia and similar patterns of adjustment that can be explained by backward-looking expectation rules. Notably, we show that refining these rules with similarity-based learning approach improves their predictive power.

A second project belonging to the first and second objectives of the research proposal has been submitted as a pre-result report, received a Revise and Resubmit decision and has been resubmitted at Experimental Economics. This second project is a collaboration between the French team (C. Cornand and A. Zylbersztejn) and the German team (F. Heinemann and M. Bulutay). It develops a method for measuring strategic uncertainty attitudes and distinguishing them from risk and ambiguity attitudes.
Our main idea is to elicit and compare the certainty equivalents (willingness to accept) for lotteries under three different sources of uncertainty: strategic uncertainty, risk and ambiguity. More precisely, our method consists in comparing the certainty equivalents of participating in two strategic 2x2 games with the certainty equivalents of lotteries that yield the same possible payoffs with exogenously given probabilities (risk) that match the beliefs of players in the respective game. Similarly, we compare certainty equivalents of two lotteries with unknown probabilities (ambiguity) with certainty equivalents of risky lotteries whose probabilities match the stated probabilities in the ambiguous lotteries.
We are now waiting for the decision of the journal and the reopening of experimental laboratories before running the experiments.

Finally a third project also had to be delayed due to the Covid sanitary crisis. In the project proposal, we also planned to organize a workshop, which has not been possible due to the sanitary conditions.
The third project is a collaboration between the French team (C. Cornand, M. A. Erazo and A. Zylbersztejn) and the German team (M. Bulutay).
This project is closely related to the first one and proposes to refine the analysis of expectation formation owing to a laboratory experiment using eye-tracking and mouse-lab.

Bulutay M., Cornand C. and Zylbersztejn A. (2020), «Learning to deal with repeated shocks under strategic complementarity: An experiment«, Journal of Economic Behavior and Organization, In Press. doi.org/10.1016/j.jebo.2020.05.02

Bruttel L., Bulutay M., Cornand C., Heinemann F., Zylbersztejn A. (2020), «Measuring strategic uncertainty attitudes«. [registered report, revised and resubmitted at Experimental Economics]

Bulutay M., Cornand C., Erazo M. A., Zylbersztejn A. (2020), «Bubbles, Expectations and Attention«. [In progress]

Strategic uncertainty is defined by uncertainty that players face with respect to the strategies chosen by other players. While economic theory mostly applies equilibrium concepts like Nash or rational expectations equilibria that are based on the absence of strategic uncertainty, experiments show that real decision makers are sensitive to strategic uncertainty. Laboratory experiments have indicated that most humans waive a substantial part of their expected payoff in order to avoid that their payoff depends on the decisions by others, which has been called strategic uncertainty aversion. This has far-reaching consequences for economic efficiency, because it implies suboptimal levels of investment and risk-taking in market environments.
Our project first aims at developing a method for measuring strategic uncertainty aversion. Our main idea is to elicit the willingness to pay for participating in a game and subjective probabilities for the potential payoffs in this game. The difference between the subjectively expected payoff and the willingness to pay is the amount that a subject is willing to waive for avoiding the respective uncertainty. This defines a premium for strategic uncertainty in a similar vein as the risk premium that measures the difference between a subject’s willingness to pay for participating in a lottery and the expected payoff from that lottery.
Secondly, we want to find out how strategic uncertainty aversion is affected by the characteristics of the game, and how it compares to risk aversion and ambiguity aversion in the classical sense. For this, we want to compare premia for strategic uncertainty in different games with risk premia and ambiguity premia (that are defined in a similar way for lotteries without known probabilities).
Because strategic uncertainty aversion may lead to inefficient outcomes, our third goal is to analyze by which means strategic uncertainty can be reduced. Here, we want to analyze the policy implications of strategic uncertainty aversion. In particular, we will consider applications to monetary economics and financial crises, where central banks and financial market regulators can change the characteristics of the game. We are also interested in how agents may themselves reduce strategic uncertainty by communication and by acquiring information about what the others know and do rather than acquiring information on the fundamental state of the economy. To this aim, we will especially analyze how different communication channels and information affect the strategic uncertainty aversion premium.
To communicate our results and promote research in the field, on top of participating at conferences and publishing our work in highly ranked journals, we plan to organize a workshop on strategic uncertainty during the second year of the project in Lyon, inviting international specialists.

Project coordinator

Madame Camille CORNAND (GROUPE D'ANALYSE ET DE THEORIE ECONOMIQUE)

The author of this summary is the project coordinator, who is responsible for the content of this summary. The ANR declines any responsibility as for its contents.

Partner

GATE - CNRS GROUPE D'ANALYSE ET DE THEORIE ECONOMIQUE
Technische Universität Berlin

Help of the ANR 176,710 euros
Beginning and duration of the scientific project: August 2019 - 36 Months

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