Research at E2MU

Little Emperors

China’s one-child policy is arguably the most audacious population control measure in modern times. While the Chinese government began dismantling it in 2015, it has been in operation for around 35 years and in that time gave rise to a generation of predominantly one-child families. The media has long characterised this generation as more self-interested and materialistic than that which preceded it. Until recently this has been opinion, but now empirical evidence gleaned through the use of experimental economics techniques suggests these generalisations are more than just intergenerational mudslinging.

Melbourne University economics lecturer Professor Nisvan Erkal, working in conjunction with academics in Australia and China, used games from experimental economics to test the character traits of those born before and after the implementation of the policy.

One of the games included in the study was the ‘Trust Game”, which tests both trust and trustworthiness. Results showed that children born after the implementation of the one-child policy gave 16 per cent less money to their partners and returned 11 per cent less of what they received compared to the those born before the introduction of the policy.

Other games tested altruism, competitiveness and aversion to risk. In each game the difference between subjects born under the policy and their counterparts was significant. The results showed those born after the introduction of the policy were less altruistic, less competitive and more risk averse.

Professor Erkal says the use of experimental economics techniques, such as those employed in the study of the one-child policy, are important as they highlight the origins of some of the basic preferences that shape our everyday decisions. “What shapes our risk preferences, social preferences, trust levels, competitiveness?” she asks. “These preferences play an important role in labour market interactions, marriage market interactions, entrepreneurship, etc. Research like this shows that siblings and family interactions play crucial roles.”

Article based on a report by  L. Cameron, N. Erkal, L. Gangadharan, X. Meng

Wishful Thinking

roulette close up

Research shows we’re hard-wired to believe we’ll beat the odds

There’s no denying that Australians love a punt. Whether it’s at the races, the casino, or online, it seems that here in ‘the lucky country’ we’re not afraid to back ourselves.

But is this willingness to play the odds justified?

A quick look at the Productivity Commission’s 2010 report into gambling in Australia suggests not. Recorded losses here in 2008-09 topped $19 billion, and almost a quarter of this was attributable to problem gamblers – a group consisting of roughly 115,000 people nationwide.

So, if the statistics show that the odds are not in our favour, why do we continue to try and defy them? Melbourne University behavioural economics lecturer Dr Guy Mayraz, has conducted a series of experiments that provide one answer.

Dr Mayraz has been investigating whether having a stake in certain outcomes causes people to believe a favourable outcome to be more likely. Or, in short, whether wishful thinking skews our decision making processes, and, if so, to what extent?

To test this, he created a scenario in which human subjects were designated as either ‘Farmers’ or ‘Bakers’. Both groups were asked to predict future wheat prices based on historical price charts. Farmers would benefit when wheat prices were high, while the Bakers, would benefit when wheat prices were low.

“The findings showed that subjects in the role of Farmers, who stood to gain from high wheat prices, predicted higher prices than Bakers, who stood to gain from low prices. That’s the wishful-thinking/optimism effect,” Dr Mayraz explains.

“Put simply, people are inclined to believe an event is more likely simply because it makes them better off,” says Dr Mayraz. “And moreover, the higher the reward, the higher their subjective probability that it is true.”

While the results offer a cautionary tale for gamblers, they also have important implications for business people.

“Taken together, these results suggest that any and all subjective beliefs are affected by wishful thinking bias, and that the bias may well be sufficiently strong to materially affect economically important decisions,” says Dr Mayraz. “High stakes decisions in financial markets are a case in point, as they involve probability assessments in situations characterised by high stakes and high subjective uncertainty—both of which are conducive to the presence of an economically significant bias.

“For example, an investment in a financial asset would cause the investor to become more sanguine about the risks, leading her to escalate the investment well beyond her original plan.”

Under Fire

Australian outback bush fires

Experimental economics techniques provide valuable insights into wildfire responses

To stay and fight or to pack up and leave? It’s a gut-wrenching decision that confronts those living in the path of a wildfire. And, while the stakes are indisputably high, one of the biggest challenges in deciding the best course of action is doing so with often scant or conflicting information.

It’s a problem that caught the attention of economists who have used the dilemma to better understand how people respond when presented with different textual representations of risk.

Researchers made use of the facilities at the Experimental Economics Lab to run three experiments in which participants were asked to decide whether to stay or leave in the face of a wildfire. To inform their decisions, subjects were provided with information represented in different textual formats. Two of the experiments added additional pressures that could be expected in an emergency. In the second experiment subjects were given just five seconds to make their decision, while in experiment three, participants were given a competing task to complete at the same time as making the decision about whether or not to stay.

One of the reports co-authors, Dr Tom Wilkening, says the research could have real-world benefits. “Both economists and individuals studying information systems recognise that individuals who are faced with uncertain choices often do not aggregate information in a way that leads to optimal decisions. So, the goal of our study was to understand how an individual’s actions change as we change the way information regarding uncertainty is displayed. Our experiments were part of a larger study that aimed to develop mobile-based apps that could be used by individuals in rural areas to make informed decisions on whether to evacuate or stay when faced with bushfire warnings.”

Dr Wilkening adds that recent history shows how important it is that people living in the path of bushfires are presented with information in the most effective way.

“Bushfires are a significant hazard encountered by many people living in Victoria. As we saw in the Black Saturday fires of 2009, the decision to stay or leave in the face of a bushfire is one where the consequences of choices are significant but where making a decision is made difficult by imperfect information regarding the path of fire and uncertainty regarding the consequences of each potential choice.”