Appendix A: Suggested Economic Experiments to Accompany Behavioral
Economics
While learning about behavioral economic concepts and models can be useful, often
students struggle to first admit that they fall prey to many of the same anomalies
that they are learning about. It is really only after we admit we are susceptible that
we can learn ways to avoid such anomalies. Economic experiments have long
served as a means for researchers to demonstrate anomalous behavior. However,
participation in economic experiments can also serve to cement in the behavioral
economics students understanding an intuitive notion of the fundamentals of
behavioral economics. For this reason, I am providing a set of experimental
protocols that should be relatively easy to implement in most college classroom
settings. These experiments are designed to accompany the materials from the
chapters of Behavioral Economics. From experience, these exercises tend to work
best when students first participate in an experiment, and then the data from the
experiment is used to teach about the anomalous behavior of interest. In order to
avoid the situation in which students use what they have learned from their
readings to perform in a superior way in these exercises, it may be worthwhile to
complete the experiments a week or two prior to covering the material and
assigning the readings in the text. This makes it difficult for a student to convince
themself that they are not subject to the same anomalous behavior that their peers
are. Moreover, the experiments can provide a point of engagement and excitement
that is difficult to obtain in most courses in economics or business. These
experiments work best when students are motivated by monetary rewards. In many
schools it will not be possible to provide these from the general instructional
budget. Alternatively, it may be worthwhile to charge students a small fee to
participate in the class (e.g., $40) and using this pool of money to reward students as
they participate in experiments throughout the semester. Generally the students
may participate in experiments with rewards or penalties accruing to their account.
The money in this account is then distributed at some later date. In the descriptions
below I refer to experimental dollars. Instructors may use actual dollars in place of
these experimental dollars. Alternatively, it may be useful to create experimental
dollars from small chits of paper that can be exchanged either for actual dollars or
course credit at some later point. Most of these experiments are best to run with a
group of 25 to 35 students. This may necessitate dividing the class into sections for
days when experiments will take place. While these suggested experiments provide
a solid basis for learning, many other experiments are freely available on the web
and can add to the experience.
All-You-Can-Eat Candies
(Supports Chapter 2)
Purpose: The purpose of this experiment is to demonstrate the sunk cost fallacy
using a simple and inexpensive experiment.
Materials: The instructor will need:
i)
A large bowl full of candies – more than the entire class would eat in a
setting. These should be candies that can be eaten in approximately
continuously varying amounts (e.g., M&Ms, Nerds) and that are
generally desirable.
ii)
Paper cups that can be used to dole out small amounts of the candy.
iii)
Experimental dollars ($4 worth for each participant).
iv)
Small slips of paper.
v)
An even number of poker chips and an opaque bag or bowl to draw
them from.
vi)
A pen.
Preparation: Place the large bowl of candies on a table that is visible to all
participants. Upon each poker chip, write a price. Half of the poker chips should list
a higher price, like “Price = $2”, while the other half should list a lower price, like
“Price = $1”. These prices should be chosen to be appropriate to the particular
participants and their value for access to the candy chosen. The higher price should
be low enough that most will be willing to pay this price for access to the candy.
Write a participant number on each cup to allow you to keep track of how much was
eaten by each and which price they paid.
For the Instructor: As class members arrive, hand each one a slip of paper. At the
same time, hand each class member $4 worth of experimental dollars. Once all have
arrived, begin by reading aloud the For the Participant instructions. Ask if there are
any questions regarding the procedure. Instruct them to write down their
maximum willingness to pay for the candy. Then, call each student to the front of the
class one at a time. Allow each student to draw a poker chip to determine the price.
If the price is below their willingness to pay, take the necessary number of
experimental dollars as a fee, and give the student a cup with a pre-determined
number of pieces of candy (e.g., 10). Remind them that these may be eaten at the
pleasure of the participant—but cannot be shared with any other classmates, nor
removed from the classroom. Once these have been eaten, the student is allowed at
any point during the class to return to the front and receive another serving. Inform
them that they will need to return any uneaten candy to you in this cup at the end of
the class. The number of candies in a cup should be chosen to be small enough that
most students will want to return at least once, and many will want to return 3 or
more times. Note on a piece of paper the subject number from the cup, and keep
track of how many times the student returns for more candies. Also note the price
each student pays, as well as their willingness to pay next to their participant
number. Students may participate in other instruction, or an exercise (such as
Reference Dependent Demand below) in the remaining class time. At the end of
the class, collect all uneaten candy and use this and the number of refills each
participant received to determine how many candies each student ate.
For the Participant: You will now have the opportunity to purchase access to allyou-can-eat candy with the experimental dollars you have been given. Those who
purchase access to all-you-can-eat candy will be given a paper cup with ___ pieces of
candy in it. You may not share this or any candy with anyone else in the class. You
may not remove any piece of candy from the classroom at the end of the class today.
You may eat the pieces of candy at your pleasure throughout the class. If at any time
after purchasing access to the candy you run out, you may return to the front of the
class for a refill of your cup.
In order to purchase access to the candy, you must first place a bid. Each of you will
write down the highest amount you would be willing to pay to obtain access to allyou-can-eat candy on your slip of paper. The highest bid you are allowed to write
down is $4. Once you have written down the most you would be willing to pay, the
price for access will be determined. Your price will be determined in the following
way. The instructor will call you to the front of the class and ask you to blindly draw
a poker chip from a bag (or bowl). This poker chip will have a price written upon it.
If this price is above your maximum willingness to pay, then you will not purchase
access to the candy. If this price is below your maximum willingness to pay, you will
pay the price on the poker chip, and be given access to the candy. All remaining
experimental dollars will be yours to keep. It is in your best interest to write down
the greatest amount your would be indifferent between retaining, or giving up in
exchange for access to the candy. If you bid too little, you may end up forgoing the
candy when you really want it. If you bid too much, you may end up losing more
money than the candy is really worth to you.
Suggestions for Use in Lecture: The key to this experiment is to use the
willingness to pay data to eliminate selection bias. If we simply compare the number
of candies eaten by those who pay the high price to the number of candies eaten by
those who pay the low price, any difference may be due to the fact that those with
higher willingness to pay also like candy a lot more. Instead, select only those who
were willing to pay more than the higher price for your analysis. The analysis is
most easily presented by comparing the mean number of candies eaten for the
higher price to the mean number eaten for the lower price. A simple difference in
means test could be presented if the background of the students includes statistics.
In general we find that those who pay more (given that all were willing to pay either
price) tend to eat more, demonstrating that they were eating to get their money’s
worth rather than based on independently declining marginal utility of
consumption. This can be a powerful example when presenting sunk cost fallacy in
classroom lectures.
Reference Dependent Demand
(Supports Chapter 2)
Purpose: These hypothetical questions are designed to demonstrate that students
tend to base their evaluations of worth and utility on context.
Materials: The instructor will need:
i) Two sets of answer sheets printed from the section below, For the
Participant
Preparation: Shuffle answer sheets so that they can be distributed randomly to
students in the class.
For the Instructor: Distribute the materials to students, and ask them to read and
answer all questions. Remind students not to discuss the questions with one
another.
For the Participant:1
Form A:
I. Imagine that you are going to a sold-out hockey playoff game, and you have an extra
ticket to sell or give away. The price marked on the ticket is $5 which is what you paid
for each ticket. You get to the game early to make sure you get rid of the ticket. An
informal survey of people selling tickets indicates that the going price is $5. You find
someone who wants the ticket and takes out his wallet to pay you. He asks how much you
want for the ticket. Assume that there is no law against charging a price higher than that
marked on the ticket. What price do you ask for if
1. He is a friend_______________
2. He is a stranger_________________
What would you have said if instead you found the going market price was $10?
3. Friend _______________
4. Stranger________________.
II. You are lying on the beach on a hot day. All you have to drink is ice water. For the last
hour you have been thinking about how much you would enjoy a nice cold bottle of your
favorite brand of soda. A companion gets up to go make a phone call and offers to bring
back a soda from the only nearby place where beer is sold a fancy resort hotel. He says
that the beer might be expensive and so asks how much you are willing to pay for the
beer. He says that he will buy the beer if it costs as much or less than the price you state.
But if it costs more than the price you state he will not buy it. You trust your friend, and
there is no possibility of bargaining with the bar- tender. What price do you tell him?
All materials for this exercise reprinted with permission from Thaler, R. “Mental
Accounting and Consumer Choice” Marketing Science 27(1980): 15-25.
1
Form B:
I. Imagine that you are going to a sold-out hockey playoff game, and you have an extra
ticket to sell or give away. The price marked on the ticket is $5 but you paid $10 each for
your tickets when you bought them from another student. You get to the game early to
make sure you get rid of the ticket. An informal survey of people selling tickets indicates
that the going price is $5. You find someone who wants the ticket and takes out his wallet
to pay you. He asks how much you want for the ticket. Assume that there is no law
against charging a price higher than that marked on the ticket. What price do you ask for
if
1. He is a friend_______________
2. He is a stranger_________________
What would you have said if instead you found the going market price was $10?
3. Friend _______________
4. Stranger________________.
II. You are lying on the beach on a hot day. All you have to drink is ice water. For the last
hour you have been thinking about how much you would enjoy a nice cold bottle of your
favorite brand of soda. A companion gets up to go make a phone call and offers to bring
back a soda from the only nearby place where beer is sold a small, run-down grocery
store. He says that the beer might be expensive and so asks how much you are willing to
pay for the beer. He says that he will buy the beer if it costs as much or less than the price
you state. But if it costs more than the price you state he will not buy it. You trust your
friend, and there is no possibility of bargaining with store owner. What price do you tell
him?
Suggestions for Use in Lecture: For questions I and II, compare the mean
responses of students for each of the answers. The questions posed on form A and
form B are identical aside from the context given in questions I and II. Students in
question I will have a tendency to value the tickets according to how much they paid
for them. Thus, we should see higher average responses for form B, that paid $10,
than A, that paid $10. Alternatively, individuals tend to expect higher prices at a
resort than at a grocery store. Thus, we should find students with for A giving a
higher mean willingness to pay than those with Form B in question II. These could
be presented with simple means, or including t-tests for differences in the means if
appropriate for the class and number of students. Question III on forms A and B are
identical. Further, the outcomes from the questions in III are all financially identical,
and thus would lead one to think that there is no difference in how happy each
individual is. Nonetheless, if you present the total percent circling A, B, and “No
Difference” from both Forms A and B you will most often find that students believe
Mr. A is better off in 1 and 2, and B is better off in 3 and 4. This can be useful in
introducing the notion of reference dependent demand.
Going to the Game and the Theater
(Supports Chapter 3)
Purpose: These questions are designed to show that students base their decisions
on how to spend based upon prior spending rather than future cost and benefit.
Materials: The instructor will need:
i.) Two sets of answer sheets printed from the section below For the
Participant
Preparation: Shuffle answer sheets so they can be randomly assigned to students.
For the Instructor: Distribute the materials to students, and ask them to read and
answer all questions. Remind students not to discuss the questions with one
another.
For the Participant: 2
Form A:
1. How much do you spend in an average week on entertainment? ______________
2. How much do you spend on clothing in the average month? ____________
3. How much do you spend on food in the average week? _____________
4. Suppose you are out at a favorite hang-out with friends and spend $25 for food
and drink. How much would spend on entertainment the rest of the week?
________________
5. Suppose you receive an unexpected notice from the university that you owe $200
due immediately. The university had raised their activities fees just after you had
paid your tuition and fees for the semester leading to the extra charge. How much
would you spend on clothing the rest of the month? _____________
6. You have just purchased the ingredients for a gourmet meal you have intended to
make for quite a while. The ingredients cost $40. How much will you spend on food
the rest of the week? _____________
7. You accidentally spill a glass of juice on the carpet of your apartment, creating a
stain. The landlord charges you $50 to clean the stain. Would you purchase a $25
ticket to a concert event later in the week? (Circle your answer)
These materials are based upon Heath, Chip and Jack B. Soll. “Mental Budgeting
and Consumer Decisions” Journal of Consumer Research 23(1996): pages 44 and 48.
2
Yes
No
8. You buy a $75 sweater you found at a nearby store. Would you purchase a $35
pair of jeans later in the month? (Circle your answer)
Yes
No
9. You are required to buy a $60 novel for an English class. Would you purchase $25
worth of salmon for a dinner later in the week? (Circle your answer)
Yes
No
Form B:
1. How much do you spend in an average week on entertainment? ______________
2. How much do you spend on clothing in the average month? ____________
3. How much do you spend on food in the average week? _____________
4. Suppose you leave your apartment and find an unexpected parking ticket on your
car for the amount of $25. How much would spend on entertainment the rest of the
week? ________________
5. The weather turns cold unexpectedly early and you are forced to purchase a $200
winter coat. How much would you spend on clothing the rest of the month?
_____________
6. Your car has broken down, requiring you to spend $40 on repairs. How much will
you spend on food the rest of the week? _____________
7. You spend $50 to attend a sporting event. Would you purchase a $25 ticket to a
concert event later in the week? (Circle your answer)
Yes
No
8. You lose your wallet while walking around town. The wallet is later returned to
you and you find that all your items are still in the wallet, but that $75 in cash is
missing. Would you purchase a $35 pair of jeans later in the month? (Circle your
answer)
Yes
No
9. You spend $60 on food for a special dinner. Would you purchase $25 worth of
salmon for a dinner later in the week? (Circle your answer)
Yes
No
Suggestions for Use in Lecture: Compare the average amounts given in questions
4 through 6 across forms B and A. In most cases, you will observe a lower amount
when the earlier spending was in the same category (food, clothing, entertainment)
as the future purchase question. Similarly you can compare the percentage “yes”
responses to questions 7 through 9 for forms A and B. Again, you should see more
being willing to make the future purchase when the faced with an income shock
rather than after having spent within category. This is suggestive that individuals
decide their future expenses based upon their recent history rather than evaluating
the future costs and benefits of consumption. In each case, the income effect is
controlled by including a prior expense of identical amounts between the two forms.
Thus, someone who has lost $75 from their wallet should have the same enjoyment
and cost for a $35 pair of jeans as one who has purchased a $75 sweater.
Rebates and Bonuses
(Supports Chapter 3)
Purpose: Demonstrate that how students spend money will be influenced by how
the income was acquired. This may not be possible in classes where a monetary
reward is not possible.
Materials: A small amount of money for each student (~$5), printed instruction
sheets and accounting sheets listed under For the Participant.
Preparation: Randomly assign students into conditions by row or other technique,
so that you can pre-record which students receive form A and which receive form B.
For the Instructor: Distribute the instruction sheets at one lecture surreptitiously
noting which students receive which forms. At a future lecture, distribute the
accounting sheets so that those in condition A receive accounting form A and those
in B receive accounting form B. Please ensure that students read all instructions in
both dispensations.
For the Participant:
Form A:
To support the activities of this class, students have been charged a fee. It has been
discovered that the fees collected exceed the required expenditures. Thus, we are
returning your portion of the excess. Consider this a rebate on the course fees.
Form B:
We have decided to give each student in the class a bonus payment to show our
appreciation for attendance.
Accounting Form A:
Previously we distributed course fee rebates in class. We are interested in how this
money was spent. Please indicate your name, the approximate date spent, the items
spent on and the approximate cost.
Name:
Date
Item
Amount Spent
Accounting Form B:
Previously we distributed bonus payments to the class. We are interested in how
this money was spent. Please indicate your name, the approximate date spent, the
items purchased and the approximate cost.
Name:
Date
Item
Amount Spent
Suggestions for Use in Lecture: Typically those given money considered as a
rebate will be much more likely to either save the money, or put it to some
utilitarian use (e.g., food, clothing, or other necessary expenses). Those given a
bonus are usually apt to recall spending on much more frivolous items. The best
way to use this in class is to:
1. Find anecdotal examples from the accounting lists that could be shared.
These may be more typical examples.
2. Quickly rate (or have a teaching assistant rate) each expense as more
frivolous or utilitarian. Then report the percentage of money spent on
frivolous versus utilitarian purchases for each group in class. If short of time,
students can be asked to classify their own expenses as frivolous or
utilitarian as part of the exercise, though sometimes this results in an ex post
revision of the list of expenses.
Segregating and Aggregating
(Supports Chapter 3)
Purpose: This exercise demonstrates that individuals prefer segregated gains and
aggregated losses.
Materials: Print out a questionnaire for each student from For the Participant.
Alternatively, this set of questions could be conducted as an in-class survey using
electronic voting (via texting or clicker).
Preparation: Print and distribute sheets.
For the Instructor: Each question asks students to consider two individuals who
have had the same monetary shock, though each shock is framed differently.
For the Participant: 3
Consider the following four vignettes.
1. George was given two scratch-off game cards from a local fast food
restaurant participating in a promotion. One of the game cards resulted in
George winning a $45 gift certificate, while the other resulted in his winning
a $10 gift certificate. Albert was given one scratch off game ticket which
resulted in a $55 gift certificate. Who was happier?
Albert
George
Neither
2. George received a notice from his landlord stating that due to an increase in
the utility costs, his monthly rent was going to increase by $100. The same
day he received a notice from his auto insurance company that prices were
increasing resulting in a $50 per month increase in the cost of insurance.
Albert received a notice from his landlord that due to an increase in the
monthly cost of utilities, his rent would be increasing by $150. His auto
insurance rates remained the same. Which was more upset?
Albert
George
Neither
3. A hailstorm damaged George’s car requiring him to pay $1000 to repair the
damage. The same day he received a gift from his grandmother for $300. The
same hailstorm caused damage to Albert’s car requiring him to pay $700 to
repair the damage. Which was more upset?
Albert
George
Neither
These materials are based upon Thaler, R.H. “Mental Accounting and Consumer
Choice.” Marketing Science 27(2008): page18.
3
4. George received an unexpected check for $1000 in the mail resulting from a
contest he had entered a few months before. The same day, his car broke
down requiring him to spend $300 on repairs. Albert received a $700 check
in the mail resulting from a contest. Which was happier?
Albert
George
Neither
Suggestions for Use in Lecture: In class report the percentage of students giving
each answer to each question. In most cases, students believe that receiving
multiple gains will make you happier even if the amount gained is the same.
Similarly, one receiving fewer losses is happier even if the amount lost is the same.
In the case of questions 3 and 4, a large gain with a small loss is most often
considered a worse outcome than a more moderate gain with no loss. A large loss
with a small gain is considered better than a more moderate loss with no gain. This
demonstrates the impact of segregation on the evaluation of outcomes.
Pre-Payment and Post-payment
(Supports Chapter 3)
Purpose: This exercise demonstrates that individuals tend to be more willing to
borrow money to pay for items that provide ongoing consumption, and less willing
to borrow for items that are consumed once.
Materials: The instructor will need:
i.) Two sets of answer sheets printed from the section below For the
Participant
Preparation: Shuffle answer sheets so they can be randomly assigned to students.
For the Instructor: Distribute the materials to students, and ask them to read and
answer all questions. Remind students not to discuss the questions with one
another.
For the Participant: 4
Form A.
1. Imagine that you are planning a trip to Cancun Mexico for Spring Break next year.
The vacation will cost $3000. Would you rather:
a. Make 12 monthly payments of $250 for the 12 months prior to the trip.
b. Make 12 monthly payments of $250 for the 12 months following the trip.
Form B.
2. Imagine that you are planning on purchasing a used car in one year. The car will
cost approximately $3000. Would you rather
a. Make 12 monthly payments of $250 for the next 12 months before
purchasing the car.
b. Make 12 monthly payments of $250 for the 12 months following the
purchase of the car.
Suggestions for Use in Lecture: Simply present the percentages that choose the
pre-payment and post-payment options under each scenario. In general students
prefer post payment when consumption continues into the future (like with a car),
Reprinted with permission from Prelec, D. and G. Loewenstein. “The Red and the
Black: Mental Accounting of Savings and Debt.” Marketing Science 17(1998):page 6.
4
while preferring pre-payment for a one time consumption experience (like Spring
Break).
Coherently Arbitrary Bidding
(Supports Chapter 4)
Purpose: This exercise demonstrates that people can be influenced by arbitrary
ways in which questions are framed when forming their preferences.
Materials:
i.) A set answer sheets printed from the section below For the Participant
ii) A set of objects that can be auctioned off. This can be something as small as a
mug, tickets to a sporting event or an item emblazoned with a school logo. The
value of the good should be approximately equal to $X where X is the number of
students in the class divided by two. This could be funded by course fees, or by the
auction itself.
iii) A bag and either Ping-Pong balls or a sheet of paper.
Preparation: Print out one answer sheet for each student in the class. Before class,
fill in the student number and the blank in question 1 by entering sequentially the
numbers from 1 to 𝑛, where 𝑛 is the number of students in the class. Thus, the first
sheet will ask if the student would be willing to buy the item for $1, while the 𝑛th
sheet will ask if the student is willing to buy the item for $𝑛. Then, shuffle the
answer sheets before distributing. Display the item to be auctioned visibly at the
front of the lecture hall so all students can see it.
Number the Ping Pong balls (or small slips of paper) from 1 to 𝑛, and place in
the bag. It is possible to either endow students with money from the student fees
collected for the course in order to play this game, or to simply require that students
use their own money.
For the Instructor: Distribute the answer sheets to students, and ask them to read
the instructions, but not to answer any questions yet. Remind students not to
discuss the questions with one another. Once all have read the materials, read the
following instructions with them:
“I have here a ____________ that we will be auctioning off today. One student will be
given the chance to purchase this good. You will note that your answer sheet asks
you two questions.
“The first question asks whether you are willing to purchase the item for a specified
amount. The second question asks for the largest amount of money you would be
willing to pay in order to obtain the good. In a moment I will ask you to fill in this
amount. Before you do, I will explain how the transaction will take place.
“First, each of you will fill in your answer to questions 1 and 2. Please remember to
write your name on the answer sheet.
“Second, I will collect these answer sheets.
“Third, I have a bag here that contains Ping-Pong balls numbered from 1 to ___--the
number of students in the class. I will draw a ball at random to determine which
student has the possibility of purchasing the item. Suppose I draw the number 5.
Then student number 5 would have the chance to purchase the item. I will then
return this ball to the bag, and randomly select a ball again to determine the price.
Suppose I selected the number 15. If student number 5 stated a number greater
than 15 in question 2, then next class student number 5 would need to bring $15,
and I will give him the item. If student number 5 stated they were willing to pay only
some number less than 15, then I would keep the item, and the student would keep
their money.
(It may be worthwhile giving a few more examples).
“Note that it is always in your best interest to state the highest amount of money you
would be willing to pay for the item.”
“I need two volunteers to verify that this bag contains one and only one example of
each number.”
(call on two volunteers and let them inspect the bag).
“Are there any questions regarding the procedure?”
“The first question asks whether you are willing to purchase the good at a price
specified on your answer sheet. Please circle either yes or no now.”
(wait for all to circle their answer).
“Please fill in your maximum willingness to pay in question 2 now”
Once all have filled in answers, collect the sheets and implement the bidding
mechanism as described.
For the Participant:
Name:_________________________
Student Number: ______________
Today, one student will be given the chance to purchase this good through one of
two mechanisms. Below you will be asked to answer two questions.
The first question asks whether you are willing to purchase the item for a specified
amount. The second question asks for the largest amount of money you would be
willing to pay in order to obtain the good. After each student fills in answers to
questions 1 and 2, the instructor will collect these answer sheets.
The instructor will randomly select a student by drawing a number out of a bag. The
bag contains one and only one instance of each student number (listed on this
sheet). The instructor will then draw a number to determine the price.



If your student number is drawn, and the price is greater than your answer
to question 2 below, you will not purchase the good.
If your student number is drawn, and the price is less than or equal to your
answer to question 2, you will purchase the good and will need to bring
money equal to the price to the instructor in order to obtain the good.
If your student number is not drawn, you will not purchase the good.
It is always in your best interest to state the highest amount of money you would be
willing to pay for the item so that you can purchase the good in the event your
number is drawn and the price is low enough that you would like to purchase it.
Please do not answer questions 1 or 2 until instructed to do so.
Question 1. Would you be willing to buy the item if the price were $_____________
Circle one:
Yes
No
Question 2. What is the largest amount of money you would be willing to pay in
order to obtain the item? $_________________
Suggestions for Use in Lecture: In order to use this in lecture, it is often most
effective to use a simple plot of student numbers and willingness-to-pay measures.
This can be produced easily using office software such as Microsoft Excel. On the xaxis you would plot student number. On the y-axis you would plot bids. You may
need to plot a linear regression line to draw attention to the relationship between
the two. In presenting this to the class, make sure to emphasize

The student numbers were passed out at random and had no inherent
relationship to the good

Students were asked whether they would be willing to pay an amount
corresponding to their student number prior to bidding. This should not impact
their bid if their preferences are well formed and stable.

In most cases the student number does influence willingness to pay,
indicating that preference formation occurs when asked for a willingness to pay.
Also, this indicates that individuals anchor on arbitrary numbers when formulating
their preferences.
Defaults and Insurance:
(Supports Chapter 4)
Purpose: This exercise is used to demonstrate that most people tend to accept a
default option. Note this is similar to the default insurance example referenced in
chapter 4.
Materials: Two sets of printed answer sheets listed under For the Participant.
Preparation: This exercise is best conducted on the first day of class as one goes
over the course rules and procedures. Shuffle answer sheets so that they can be
distributed randomly to students in the class.
For the Instructor: Distribute the materials to students, and ask them to read the
instructions and answer the question. Ask those who wish to opt out of the default
to hand in their slip of paper. If the choice offered is inappropriate for your class,
two other similar choices could be offered (for example one option could eliminate
the option to appeal a mis-graded assignment). The choices should be such that
students do not strongly favor one or the other option.
For the Participant:
Form A:
Several homework sets will be required over the course of the year. Your grade for
the homework will be calculated in one of the following ways:
(a)
The lowest homework grade will be dropped when calculating your
homework average, and this average will be applied to all homework
scores when calculating your final grade. No extra credit will be
available.
(b)
All homeworks will be graded normally and these grades will count.
However, if you desire, extra credit assignments will be available in order
to make up for poor performance on assignments.
By default I will calculate your grade according to (a). However, if you sign the
statement below and return the form to me by the end of lecture today I will grade
your homework assignments according to (b).
I desire to have my homeworks graded according to (b), signed
_________________________________
Name: __________________________________
Form B:
Several homework sets will be required over the course of the year. Your grade for
the homework will be calculated in one of the following ways:
(a)
All homeworks will be graded normally and these grades will count.
However, if you desire, extra credit assignments will be available in order
to make up for poor performance on assignments.
(b)
The lowest homework grade will be dropped when calculating your
homework average, and this average will be applied to all homework
scores when calculating your final grade. No extra credit will be
available.
By default I will calculate your grade according to (a). However, if you sign the
statement below and return the form to me by the end of lecture today I will grade
your homework assignments according to (b).
I desire to have my homeworks graded according to (b), signed
_________________________________
Name: __________________________________
Suggestions for Use in Lecture: In class you should simply report the percentage
of students who handed in forms under each default. Students will have a tendency
to rely on the standard option in most cases. Here they may tend to do so even
though it has an impact on their final grade.
Endowment Game
(Supports Chapter 4)
Purpose: This exercise demonstrates the endowment effect: that willingness to
accept to part with an item is generally greater than willingness to pay to obtain that
same item.
Materials:
i.)
Several identical items (like a mug) for exactly half of the class.
ii.)
Two sets of answer sheets printed from the section below For the
Participant
iii.)
Die
Preparation: The answer sheets should be printed and shuffled so that they may
be randomly assigned. This exercise is best conducted using individual money
accounts created by student fees for the course. Otherwise you will need to inform
students that they will need money ahead of time.
For the Instructor: When students arrive, distribute answer sheets. Ask those who
have received form A to raise their hand and distribute the items to these
individuals. Ask students to read the instructions, but not to answer the question
yet. Remind students not to discuss the questions with one another.
Once all have read the instructions, read the following to them. “Several of you have
been given ___________. These now belong to you. However, you will have the
opportunity to sell the item if you wish to students who have not received them. We
will create a market for these items in the following way. Those who currently have
one of the items will be asked for the smallest amount of money that would be
required for them to agree to part with the gift. We will call this their willingness to
accept (WTA). Those who do not have the items will be asked for the largest amount
of money they would be willing to pay to obtain the item. We will call this their
willingness to pay (WTP).
“Once all have recorded these amounts, we will collect all answer sheets and
determine the price for our market. Once the price is determined,
 All with WTA less than the market price will give up the good and receive the
market price in exchange.
 All with a WTA greater than the market price will keep the good and receive
no money.
 All with a WTP greater than the market price will be required to pay the
market price and receive the good in exchange.
 All with a WTP less than the market price will keep their money and receive
no good.
“The market price will be determined by constructing a demand and supply curve
from the responses and determining their intersection. Practically, we will pair the
lowest WTA in the class with the largest WTP. If this WTP is larger or equal to this
WTA, then we will continue to the second smallest WTA and the second highest
WTP. If this WTP is larger than this WTA we will continue to the third pair and so on
until we find the first WTA that is greater than it’s corresponding WTP. If this is the
𝑛th pair we compared, then we will set the price equal to the WTA for the (𝑛 − 1)th
price.
“For example, if there were ten in the class and the WTA bids were 1, 2, 3, 4, 5; and
the WTP bids were 4, 3, 2, 1, 1, the first pair would be 𝑊𝑇𝐴 = 1 < 4 = 𝑊𝑇𝑃. The
second pair would be 𝑊𝑇𝐴 = 2 < 3=WTP. The third pair is 𝑊𝑇𝐴 = 3 > 2 = 𝑊𝑇𝑃.
Thus, the price would be set at 2, and those bidding 4 and 3 would each pay 2 and
receive an item. Those willing to accept 1 and 2 would both receive 2 and give up
the item. In the event that there are more willing to pay than accept at this price, we
will use a roll of the die to determine which transactions take place. Those rolling
the largest numbers will transact.”
“Are there any questions?”
After all questions have been resolved, ask students to fill in their answers, collect
sheets and execute the market.
For the Participant:
Form A
Name_________________________
You have been given ___________. This item now belongs to you. However, you will
have the opportunity to sell this item, if you wish, to students who have not received
them. We will create a market for these items in the following way. You and others
who possess the items will be asked for the smallest amount of money that would be
required for them to agree to part with the gift. We will call this their willingness to
accept (WTA). Those who do not have the items will be asked for the largest amount
of money they would be willing to pay to obtain the item. We will call this their
willingness to pay (WTP).
Once all have recorded these amounts, answer sheets will be collected and the
instructor will determine the price for our market. Once the price is determined,
 All with WTA less than the market price will give up the good and receive the
market price in exchange.
 All with a WTA greater than the market price will keep the good and receive
no money.


All with a WTP greater than the market price will be required to pay the
market price and receive the good in exchange.
All with a WTP less than the market price will keep their money and receive
no good.
The market price will be determined by constructing a demand and supply curve
from the responses and determining their intersection. Practically, we will pair the
lowest WTA in the class with the largest WTP. If this WTP is larger or equal to this
WTA, then we will continue to the second smallest WTA and the second highest
WTP. If this WTP is larger than this WTA we will continue to the third pair and so on
until we find the first WTA that is greater than it’s corresponding WTP. If this is the
𝑛th pair we compared, then we will set the price equal to the WTA for the (𝑛 − 1)th
price.
What is the smallest amount of money you would require in order to part with the
item? _______________________
Form B
Name_________________________
Some in the class have been given ___________. You will have the opportunity to
purchase this item from one of these students, if you wish. We will create a market
for these items in the following way. Those who possess the items will be asked for
the smallest amount of money that would be required for them to agree to part with
the gift. We will call this their willingness to accept (WTA). You and others who do
not have the items will be asked for the largest amount of money they would be
willing to pay to obtain the item. We will call this their willingness to pay (WTP).
Once all have recorded these amounts, answer sheets will be collected and the
instructor will determine the price for our market. Once the price is determined,
 All with WTA less than the market price will give up the good and receive the
market price in exchange.
 All with a WTA greater than the market price will keep the good and receive
no money.
 All with a WTP greater than the market price will be required to pay the
market price and receive the good in exchange.
 All with a WTP less than the market price will keep their money and receive
no good.
The market price will be determined by constructing a demand and supply curve
from the responses and determining their intersection. Practically, we will pair the
lowest WTA in the class with the largest WTP. If this WTP is larger or equal to this
WTA, then we will continue to the second smallest WTA and the second highest
WTP. If this WTP is larger than this WTA we will continue to the third pair and so on
until we find the first WTA that is greater than it’s corresponding WTP. If this is the
𝑛th pair we compared, then we will set the price equal to the WTA for the (𝑛 − 1)th
price.
What is the largest amount of money you would be willing to pay in order to obtain
the item? _______________________
Suggestions for Use in Lecture:
In order to use this in lecture, it is often most effective to plot WTP and WTA curves
on the same graph in the form of a demand curve. This can be produced easily using
office software such as Microsoft Excel. On the x-axis would be the number of
students ranging from 1 to half the number of students in the class. On the y-axis
you would dollar amounts. For the WTA curve, the curve will plot the points such
that at each point 𝑥, we plot the maximum WTA such that there are exactly 𝑥
students who have given WTA equal to or larger than the plotted point 𝑦. This
should trace a downward sloping line. For example, the example from “For the
Instructor” would result in a plot of points (1,5), (2, 4), (3, 3), (4, 2), (5, 1).
On the same graph, but in another color or style, plot the maximum WTP that would
result in at least 𝑥 students purchasing the good. For the example in “For the
Instructor” this would result in the points (1, 4), (2, 3), (3, 2), (4, 1), (5, 1). In general
the WTP curve will be lower than the WTA curve.
In presenting this to the class, make sure to emphasize

Students were randomly assigned to either receive or not receive the items.
Rationally, there is little reason to believe that receiving the item should influence
your valuation of the item.
This indicates that possession of an item influences one preference for that item.
Vickrey Auction
(Supports Chapter 5)
Purpose: This exercise is designed to demonstrate the natural tendency of
participants to bid more than the optimal amount in a second price sealed bid
auction.
Materials: For each student you will need to print (found in For the Participant)
i.)
Instruction Sheet
ii.)
10 bidding sheets
iii.)
One value sheet for each student. Five different versions of the
value sheet are given. One fifth of the participants should
receive each version. Additionally, the instructor will need at
least one copy of each value sheet.
Additionally, you will need to print 20 reward sheets (found in For the Instructor)
These materials are designed to conduct 10 rounds of the Vickrey auction. Materials
can be adjusted to accommodate fewer rounds if desired. This experiment is best
conducted with experimental dollars.
You will also need one die.
Preparation: Print all materials. Shuffle the value sheets so that they may be
randomly assigned to students. To conserve lecture time, you may wish to
distribute materials prior to students entering the lecture room. Each student will
need one instruction sheet, one value sheet, 10 bidding sheets.
For the Instructor: Request that all students read the instruction sheet given them.
Emphasize that students should not communicate with each other over the course
of the experiment. Once all have read the instructions, you may reread the
instructions aloud if desired. Ask students if they have any questions regarding how
the experiment will proceed. You may need to make some statement about how
experimental dollars will translate into actual dollars.
Ask students to fill out their first “Bid Sheets”, and then collect the sheets.
Determine the winner and the price for the auction as described. Fill out two reward
sheets. Declare the winner along with the winning bid and the auction price. Give
one reward sheet to the winner and retain the remaining for your records. After the
first round, you may choose to explain the auction mechanism again and use the
bids from the first round as an example. Future rounds are conducted in the same
way. If an individual wins a second time, be sure to use their prior reward sheet to
calculate an accurate budget for the next round. You may need to explain this budget
to the winner in each round.
Reward Sheet
Round Number:_______________________
Winner’s Name:_______________________
Winner’s Value:_______________________
Auction Price:_______________________
The resulting budget (Prior budget + Winner’s Value – Auction Price) = _______________
(Bids in future periods should not exceed this budget).
For the Participant:
Instruction Sheet
You will now be participating in a series of 10 auctions. Each of the auctions will be
conducted in the same manner. You have been given 10 experimental dollars to use
in these auctions. In each auction, you will have the opportunity to bid by filling out
your “Bid Sheet” with the amount of your bid. At no time are you allowed to bid
more than the amount remaining from this 10 experimental dollars.
Winning the auction means you will receive a particular amount of money. The
amount of money you receive is assigned to you and may differ from the amount
another student might win in the auction. You have been given a sheet of paper
labeled “Value Sheet.” This sheet lists how much money you will receive should you
win the auction by round. Thus, if your sheet lists “$2” under round one, then
winning the auction in the first round will result in you receiving $2. The top right
corner of your “Value Sheet” lists the type (either A, B, C, D or E). This type must be
recorded on each “Bid Sheet” prior to submitting a bid. You may record this on each
“Bid Sheet” now.
In each round, you will record your bid on your “Bid Sheet”, and fold your bid sheet
so that your bid cannot be seen by others. The bid sheets will then be collected by
the instructor or an assistant. The instructor will then announce the owner of the
highest bid. This is the winner of that round’s auction. The winner will be required
to pay the second highest bid, and receive the value specified on their value sheet
for that round. No others will be required to pay or receive any experimental
dollars. So, if there were five students in the class, and their bids were $4, $3.50, $2,
$1, then the student bidding $4 would win, and pay $3.50. If this students value for
the auction were $5, then this would result in them receiving $5 − $3.50 = $1.50 as
a result of the auction. Once the winner is announced, if there are additional rounds
left, the next round of bidding will begin. This student would then have $11.50 with
which to bid in the next round. In the event of a tie, the winner will be selected by
the roll of a die. Each person placing the highest bid will roll the die, with the highest
roll resulting in a win. The winner in this case will pay their bid.
Value Sheet
Form A
Round
Value
1
$1.00
2
$1.00
3
$1.50
4
$1.50
5
$2.00
6
$2.00
7
$2.50
8
$2.50
9
$3.00
10
$3.00
2
$3.00
3
$2.50
4
$2.50
5
$1.50
6
$1.50
7
$2.00
8
$2.00
9
$1.00
10
$1.00
2
$2.00
3
$3.00
4
$3.00
5
$1.00
6
$1.00
7
$1.50
8
$1.50
9
$2.50
10
$2.50
2
$1.50
3
$1.00
4
$1.00
5
$2.50
6
$2.50
7
$3.00
8
$3.00
9
$2.00
10
$2.00
2
$2.50
3
$2.00
4
$2.00
5
$3.00
6
$3.00
7
$1.00
8
$1.00
9
$1.50
10
$1.50
Value Sheet
Form B
Round
Value
1
$3.00
Value Sheet
Form C
Round
Value
1
$2.00
Value Sheet
Form D
Round
Value
1
$1.50
Value Sheet
Form E
Round
Value
1
$2.50
Bid Sheet
Name:____________________________
Value Sheet Form: ______________
Round Number:_________________
My bid: __________________________
Should not exceed $10 plus your winnings (or minus your losings) from prior
rounds.
Suggestions for Use in Lecture: In presenting the results of the Vickrey auction in
class it is often most useful to first explain the optimal bid in the Vickrey auction is
to bid one’s assigned value. Then:

Define a variable 𝑦𝑡 = 𝑥𝑡 − 𝑣𝑡 , where 𝑥𝑡 is an individual’s bid in auction 𝑡 and
𝑣𝑡 is the individual’s valuation in auction 𝑡. Thus 𝑦𝑡 is the excess bid. Present the
class average 𝑦𝑡 by round.

Present the percentage of students bidding above their value by round.

Present the net winnings in each round of the auction. This is particularly
effective if the net winnings are negative-a regular occurrence
English Auction
(Supports Chapter 5)
Purpose: This exercise is designed to demonstrate bids within the English Auction
tend to be lower (and thus closer to the optimum) than the Vickrey Auction bids.
Materials: For each student you will need to print (found in For the Participant)
i.)
Instruction Sheet
ii.)
One value sheet for each student. Five different versions of the value
sheet are given. One fifth of the participants should receive each version.
Additionally, the instructor will need at least one copy of each value
sheet. Note that ties will be common with only five versions of the value
sheet. If the instructor wishes, they can create additional versions of the
value sheets to reduce the number of ties. Alternatively, one may simply
run the auction within groups of 5 (so each group of 5 has one of each
value sheet).
iii.)
Bid Sheet
Additionally, you will need to print 20 reward sheets (found in For the Instructor)
These materials are designed to conduct 10 rounds of the English auction. Materials
can be adjusted to accommodate fewer rounds if desired. This experiment is best
conducted with experimental dollars.
You will also need one die.
Preparation: Print all materials. Shuffle the value sheets so that they may be
randomly assigned to students. To conserve lecture time, you may wish to
distribute materials prior to students entering the lecture room. Each student will
need one instruction sheet, one value sheet, 1 bidding sheet.
For the Instructor: Request that all students read the instruction sheet given them.
Emphasize that students should not communicate with each other over the course
of the experiment. Once all have read the instructions, you may reread the
instructions aloud if desired. Ask students if they have any questions regarding how
the experiment will proceed. You may need to make some statement about how
experimental dollars will translate into actual dollars.
Ask all students to stand up, and remain standing until you call out a price they are
unwilling to pay. Begin with a small value, e.g. $0.10, and increase by increments of
$0.10. After each price in which someone sits down, remember to remind them to
record their final bid on their “Bid Sheet.” Determine the winner and the price for
the auction as described. Ask the winner for their value sheet form letter in order to
determine their valuation. Fill out two reward sheets following each auction.
Declare the winner along with the winning bid. Give one reward sheet to the winner
and retain the remaining for your records. After the first round, you may choose to
explain the auction mechanism again and use the bids from the first round as an
example. Future rounds are conducted in the same way. If an individual wins a
second time, be sure to use their prior reward sheet to calculate an accurate budget
for the next round. You may need to explain this budget to the winner in each round.
In the event of a tie, use a die roll to determine who will actually win the auction.
Reward Sheet
Round Number:_______________________
Winner’s Name:_______________________
Winner’s Value:_______________________
Auction Price:_______________________
The resulting budget (Prior budget + Winner’s Value – Auction Price) = _______________
(Bids in future periods should not exceed this budget).
For the Participant:
Instruction Sheet
You will now be participating in a series of 10 auctions. Each of the auctions will be
conducted in the same manner. You have been given 10 experimental dollars to use
in these auctions. In each auction, you will have the opportunity to bid. At no time
are you allowed to bid more than the amount remaining from the 10 experimental
dollars. At the beginning of each round, the instructor will ask you to stand. The
instructor will then begin to call out potential prices. For example, the instructor
may call out “$1.” If you are willing to pay a price of $1 in order to win the auction,
you should remain standing. If the price is too high, and you are unwilling to pay this
price, you should sit down. The instructor will continue to call out higher and higher
amounts until only one bidder remains standing. Once you sit down, you will be
required to record on your “Bid Sheet” the last called price for which you
remained standing for that round.
Winning the auction means you will receive a particular amount of money. The
amount of money you receive is assigned to you and may differ from the amount
another student might win in the auction. You have been given a sheet of paper
labeled “Value Sheet.” This sheet lists how much money you will receive should you
win the auction by round. Thus, if your sheet lists “$2” under round one, then
winning the auction in the first round will result in you receiving $2.
The winner will be required to pay the auction price, which is the last price for
which more than one bidder was standing, and receive the value specified on their
value sheet for that round. No others will be required to pay or receive any
experimental dollars. So, if two students were standing when $3.50 was called out,
but only one student when $3.51 was called out, the last student standing would
win, and pay $3.50. If this students value for the auction were $5, then this would
result in them receiving $5 − $3.50 = $1.50 as a result of the auction. Once the
winner is announced, if there are additional rounds left, the next round of bidding
will begin. This student would then have $11.50 with which to bid in the next
round. In the event of a tie, the winner will be selected by the roll of a die. Each
person placing the highest bid will roll the die, with the highest roll resulting in a
win. The winner in this case will pay their bid.
Value Sheet
Form A
Round
Value
1
$1.00
2
$1.00
3
$1.50
4
$1.50
5
$2.00
6
$2.00
7
$2.50
8
$2.50
9
$3.00
10
$3.00
2
$3.00
3
$2.50
4
$2.50
5
$1.50
6
$1.50
7
$2.00
8
$2.00
9
$1.00
10
$1.00
2
$2.00
3
$3.00
4
$3.00
5
$1.00
6
$1.00
7
$1.50
8
$1.50
9
$2.50
10
$2.50
2
$1.50
3
$1.00
4
$1.00
5
$2.50
6
$2.50
7
$3.00
8
$3.00
9
$2.00
10
$2.00
2
$2.50
3
$2.00
4
$2.00
5
$3.00
6
$3.00
7
$1.00
8
$1.00
9
$1.50
10
$1.50
Value Sheet
Form B
Round
Value
1
$3.00
Value Sheet
Form C
Round
Value
1
$2.00
Value Sheet
Form D
Round
Value
1
$1.50
Value Sheet
Form E
Round
Value
1
$2.50
Bid Sheet
Name:____________________________
Value Sheet Form: ______________
Round
1
2
3
4
5
6
7
8
9
10
Bid (last called price for which I stood)
Suggestions for Use in Lecture: In presenting the results of the English auction in
class it is often most useful to first explain the optimal bid in the English auction is
to sit down when one’s assigned value is exceeded. Then:

Define a variable 𝑦𝑡 = 𝑥𝑡 − 𝑣𝑡 , where 𝑥𝑡 is an individual’s bid in auction 𝑡 and
𝑣𝑡 is the individual’s valuation in auction 𝑡. Thus 𝑦𝑡 is the excess bid. Present the
class average 𝑦𝑡 by round.

Present the percentage of students bidding above their value by round.

Present the net winnings in each round of the auction. This is particularly
effective if the net winnings are negative-a regular occurrence
In each case, you should contrast the results with the results of the Vickrey auction.
Dutch Auction
(Supports Chapter 5)
Purpose: This exercise is designed to demonstrate the uncertainty involved in
formulating a Dutch Auction bid. As well, this will demonstrate the relationship
between the winning Dutch Auction price and the Vickrey price.
Materials: For each student you will need to print (found in For the Participant)
i.)
Instruction Sheet
ii.)
One value sheet for each student. Five different versions of the value
sheet are given. One fifth of the participants should receive each version.
Additionally, the instructor will need at least one copy of each value
sheet. Note that ties will be common with only five versions of the value
sheet. If the instructor wishes, they can create additional versions of the
value sheets to reduce the number of ties. Alternatively, one may simply
run the auction within groups of 5 (so each group of 5 has one of each
value sheet).
Additionally, you will need to print 20 reward sheets (found in For the Instructor)
These materials are designed to conduct 10 rounds of the English auction. Materials
can be adjusted to accommodate fewer rounds if desired. This experiment is best
conducted with experimental dollars.
You will also need one die.
Preparation: Print all materials. Shuffle the value sheets so that they may be
randomly assigned to students. To conserve lecture time, you may wish to
distribute materials prior to students entering the lecture room. Each student will
need one instruction sheet, one value sheet.
For the Instructor: Request that all students read the instruction sheet given them.
Emphasize that students should not communicate with each other over the course
of the experiment. Once all have read the instructions, you may reread the
instructions aloud if desired. Ask students if they have any questions regarding how
the experiment will proceed. You may need to make some statement about how
experimental dollars will translate into actual dollars.
Ask all students to be seated, and remain seated until you call out a price they are
willing to pay. Begin with a large value, e.g. $5.00, and decrease by increments of
$0.10. Wait for a student to stand after each called price. When one stands, they are
the winner and pay the price at which they stood. Ask the winner for their value
sheet form letter in order to determine their valuation. Fill out two reward sheets
following each auction. Declare the winner along with the winning bid. Give one
reward sheet to the winner and retain the remaining for your records. After the
first round, you may choose to explain the auction mechanism again and use the
bids from the first round as an example. Future rounds are conducted in the same
way. If an individual wins a second time, be sure to use their prior reward sheet to
calculate an accurate budget for the next round. You may need to explain this budget
to the winner in each round. In the event of a tie, use a die roll to determine who will
actually win the auction.
Reward Sheet
Round Number:_______________________
Winner’s Name:_______________________
Winner’s Value:_______________________
Auction Price:_______________________
The resulting budget (Prior budget + Winner’s Value – Auction Price) = _______________
(Bids in future periods should not exceed this budget).
For the Participant:
Instruction Sheet
You will now be participating in a series of 10 auctions. Each of the auctions will be
conducted in the same manner. You have been given 10 experimental dollars to use
in these auctions. In each auction, you will have the opportunity to bid. At no time
are you allowed to bid more than the amount remaining from this 10 experimental
dollars. At the beginning of each round, the instructor will ask you to be seated. The
instructor will then begin to call out potential prices. For example, the instructor
may call out “$5.” If you are willing to pay a price of $1 in order to win the auction,
you should stand up. If the price is too high, and you are unwilling to pay this price,
you should remain seated. The instructor will continue to call out lower and lower
amounts until the first bidder stands. Whoever stands first will be considered the
winner, and the auction price will be equal to the price called by the instructor when
they stood.
Winning the auction means you will receive a particular amount of money. The
amount of money you receive is assigned to you and may differ from the amount
another student might win in the auction. You have been given a sheet of paper
labeled “Value Sheet.” This sheet lists how much money you will receive should you
win the auction by round. Thus, if your sheet lists “$2” under round one, then
winning the auction in the first round will result in you receiving $2.
The winner will be required to pay the auction price, which is the price called when
they decided to stand, and receive the value specified on their value sheet for that
round. No others will be required to pay or receive any experimental dollars. So, if
the first student stood when $3.50 was called out, this student is the winner and
must pay $3.50. If this student’s value for the auction were $5, then this would result
in them receiving $5 − $3.50 = $1.50 as a result of the auction. Once the winner is
announced, if there are additional rounds left, the next round of bidding will begin.
This student would then have $11.50 with which to bid in the next round. In the
event of a tie, the winner will be selected by the roll of a die. Each person placing the
highest bid will roll the die, with the highest roll resulting in a win. The winner in
this case will pay their bid.
Value Sheet
Form A
Round
Value
1
$1.00
2
$1.00
3
$1.50
4
$1.50
5
$2.00
6
$2.00
7
$2.50
8
$2.50
9
$3.00
10
$3.00
2
$3.00
3
$2.50
4
$2.50
5
$1.50
6
$1.50
7
$2.00
8
$2.00
9
$1.00
10
$1.00
2
$2.00
3
$3.00
4
$3.00
5
$1.00
6
$1.00
7
$1.50
8
$1.50
9
$2.50
10
$2.50
2
$1.50
3
$1.00
4
$1.00
5
$2.50
6
$2.50
7
$3.00
8
$3.00
9
$2.00
10
$2.00
2
$2.50
3
$2.00
4
$2.00
5
$3.00
6
$3.00
7
$1.00
8
$1.00
9
$1.50
10
$1.50
Value Sheet
Form B
Round
Value
1
$3.00
Value Sheet
Form C
Round
Value
1
$2.00
Value Sheet
Form D
Round
Value
1
$1.50
Value Sheet
Form E
Round
Value
1
$2.50
Suggestions for Use in Lecture: It is not possible to determine any bids except the
winning bid. In presenting the results of this experiment, you should display the
winning price and the value received in each round. You should also ask students to
describe how they decided when to stand. You should emphasize that they were
unsure of whether they could remain sitting and still win once the price got below
their own value.
In each case, you should contrast the results with the results of the Vickrey auction.
Common Value Auction
(Supports Chapter 5)
Purpose: This exercise is designed to demonstrate the natural tendency for the
winner of a common value auction to bid more than the good is worth—known as
the winner’s curse.
Materials: For each student you will need to print (found in For the Participant)
i.)
Instruction Sheet
ii.)
5 bidding sheets
iii.)
One value sheet for each student. Five different versions of the value
sheet are given. One fifth of the participants should receive each version.
Additionally, the instructor will need at least one copy of each value
sheet.
Additionally, you will need to print 10 reward sheets (found in For the Instructor)
for each group of students that will participate in the auction.
These materials are designed to conduct 5 rounds of the Common Value Vickrey
auction. Materials can be adjusted to accommodate fewer rounds if desired. This
experiment is best conducted with experimental dollars. This experiment is also
best conducted in smaller groups (for example groups of 5), though this can cause
an added administrative burden. Larger groups will work, but results in fewer
winners (and hence fewer demonstrating the curse).
You will also need one die.
Preparation: Print all materials. Shuffle the value sheets so that they may be
randomly assigned to students. To conserve lecture time, you may wish to
distribute materials prior to students entering the lecture room. Each student will
need one instruction sheet, one value sheet, 10 bidding sheets.
For the Instructor: Request that all students read the instruction sheet given them.
Emphasize that students should not communicate with each other over the course
of the experiment. Once all have read the instructions, you may reread the
instructions aloud if desired. Ask students if they have any questions regarding how
the experiment will proceed. You may need to make some statement about how
experimental dollars will translate into actual dollars. Emphasize to the students
that no one knows the true value of winning the auction, but that the value will be
the same no matter who wins. Also emphasize that they have only been given a
guess of the true value.
Ask students to fill out their first “Bid Sheets”, and then collect the sheets.
Determine the winner and the price for the auction as described. Fill out two reward
sheets. Declare the winner along with the winning bid and the auction price. Give
one reward sheet to the winner and retain the remaining for your records. After the
first round, you may choose to explain the auction mechanism again and use the
bids from the first round as an example. Future rounds are conducted in the same
way. If an individual wins a second time, be sure to use their prior reward sheet to
calculate an accurate budget for the next round. You may need to explain this budget
to the winner in each round.
The common values for each round are:
Round
Value
1
$3.25
2
$3.50
3
$2.75
4
$2.15
5
$4.00
Reward Sheet
Round Number:_______________________
Winner’s Name:_______________________
Winner’s Estimate:____________________
Common Value:_______________________
Auction Price:_______________________
The resulting budget (Prior budget + Winner’s Value – Auction Price) = _______________
(Bids in future periods should not exceed this budget).
For the Participant:
Instruction Sheet
You will now be participating in a series of 5 auctions. Each of the auctions will be
conducted in the same manner, and you will only be bidding against those from your
group of 5. You have been given 20 experimental dollars to use in these auctions. In
each auction, you will have the opportunity to bid by filling out your “Bid Sheet”
with the amount of your bid. At no time are you allowed to bid more than the
amount remaining from this 20 experimental dollars.
Whichever member of your group of 5 wins the auction will receive a particular
amount of money, with the amount changing in each round of the auction. However,
none of you knows for certain what this amount of money is. However, each of you
has been given a guess as to the value of the auction listed on the paper labeled
“Value Sheet.” For each round, one of your group has been given a guess that is
equal to the true value of the auction plus $1.00, one has been given a guess equal to
the value of the auction plus $0.50, one has been given a guess equal to the true
value of the auction, one has been given a guess equal to the true value minus $0.50,
and one has been given a guess equal to the true value minus $1.00. You are not
allowed to communicate with each other regarding your guesses or your bids. The
top right corner of your “Value Sheet” lists the type (either A, B, C, D or E). This type
must be recorded on each “Bid Sheet” prior to submitting a bid. You may record this
on each “Bid Sheet” now.
In each round, you will record your bid on your “Bid Sheet”, and fold your bid sheet
so that your bid cannot be seen by others. The bid sheets will then be collected by
the instructor or an assistant. The instructor will then announce the owner of the
highest bid. This is the winner of that round’s auction. The winner will be required
to pay the second highest bid, and receive the true value of the auction. No others
will be required to pay or receive any experimental dollars. So, if there were five
students in the group, and their bids were $4, $3.50, $2, $1, then the student bidding
$4 would win, and pay $3.50. If the true value of the auction was $3.75, then this
would result in them receiving $3.75 − $3.50 = $0.25 as a result of the auction.
Once the winner is announced, if there are additional rounds left, the next round of
bidding will begin. This student would then have $20.25 with which to bid in the
next round. In the event of a tie, the winner will be selected by the roll of a die. Each
person placing the highest bid will roll the die, with the highest roll resulting in a
win. The winner in this case will pay their bid.
Value Sheet
Form A
Round
Value
1
$3.25
2
$3.00
3
$3.25
4
$1.15
5
$5.00
2
$4.00
3
$1.75
4
$3.15
5
$4.00
2
$2.50
3
$3.75
4
$2.15
5
$3.50
2
$4.50
3
$2.75
4
$1.65
5
$4.50
Value Sheet
Form B
Round
Value
1
$2.75
Value Sheet
Form C
Round
Value
1
$3.75
Value Sheet
Form D
Round
Value
1
$2.25
Value Sheet
Form E
Round
Value
1
$4.25
2
$3.50
3
$2.25
4
$2.65
5
$3.00
Bid Sheet
Name:____________________________
Value Sheet Form: ______________
Round Number:_________________
My bid: __________________________
Should not to exceed $20 plus your winnings (or minus your losings) from
prior rounds.
Suggestions for Use in Lecture: In presenting the results of the Common Value
Auction in class it is often most useful to first explain the optimal bid in this auction
is to bid one’s estimate of the value minus the maximum error (in this case minus
$1). Then:

Define a variable 𝑦𝑡 = 𝑥𝑡 − 𝑣𝑡 , where 𝑥𝑡 is an individual’s bid in auction 𝑡 and
𝑣𝑡 is the optimal bid for that individual. Thus 𝑦𝑡 is the excess bid. Present the class
average 𝑦𝑡 by round.

Present the percentage of students bidding above the common value by
round.

Present the average net winnings in each round of the auction across groups.
In general the net winnings are usually negative demonstrating the winner’s curse.
Investments and Evaluation
(Supports Chapter 6)
Purpose:
This exercise demonstrates that decision-makers who evaluate
investment portfolios less frequently will face fewer of the effects of loss aversion
because of statistical aggregation. Losses over several periods of realizations are
less likely than losses in a single period, leading to more stable and profitable
portfolios. This exercise is best accomplished when a class can be divided into two
sections. If the class cannot be divided, you will need to divide the room into halves
and ensure that there is no communication—including expressions of exasperation
when returns are revealed.
Materials: For each participant you will need to print
i.)
An instruction sheet and portfolio calculation sheets (from For the
Participant). Half of these should be form A and the rest should be of form
B
ii.)
5 investment sheets for those in treatment A
iii.)
25 investment sheets for those in treatment B
iv.)
5 return forms for those in treatment A
v.)
25 return forms for those in treatment B
You will also need to print one instructor’s return sheet (in For the Instructor) and a
pair of dice.
Preparation: Print all materials. To conserve time you may wish to distribute
materials before students arrive. This will include an instruction sheet and 5
investment sheets for each student in treatment A, and an instruction sheet and 25
investment sheets for those in treatment B. You may need assistance in distributing
materials throughout the exercise. In this case it may be helpful to ask two students
to volunteer to forgo participating and serve as assistants in return for a guarantee
of the average experimental dollar return.
For the Instructor: Request that all students read the instruction sheet given them.
Emphasize that students should not communicate with each other over the course
of the experiment and that they should refrain from making expressions that could
be interpreted as expressing exasperation or elation. Once all have read the
instructions, you may reread the instructions aloud if desired. Ask students if they
have any questions regarding how the experiment will proceed. You may need to
make some statement about how experimental dollars will translate into actual
dollars. Emphasize that the roll of one pair of dice will determine the returns from
investments. Ask for two volunteers to inspect the dice and try them to see if they
appear to be fair.
For treatment A:

Ask students to fill out the investment sheet for period 1. Make sure all have
written their name on the investment sheet.






Collect all investment sheets.
Roll the dice first to determine the returns for investment A, and record the
return on the instructor’s return sheet and the student return sheets
Roll the dice second to determine the returns for investment B, and record
the return on the instructor’s return sheet and the student return sheets
Distribute the return sheets to all students in treatment A (alternatively you
could announce the return if those in treatment B are not present)
Ask students to update their portfolio value sheet (you may need to provide
instruction)
Ask students to fill out the investment sheet for the next period and repeat
the process for all 25 periods
For treatment B:









Ask students to fill out the investment sheet for the first 5 investment
periods. Make sure all have written their name on the investment sheet.
Collect all investment sheets.
Roll the dice first to determine the returns for investment A, and record the
return on the instructor’s return sheet and the student return sheets
Roll the dice second to determine the returns for investment B, and record
the return on the instructor’s return sheet and the student return sheets
Repeat the dice rolls for each investment 5 times writing each result in the
instructor’s and student return sheet.
Calculate the five period return and record this on both instructor and
student return sheets, recording the answer on the appropriate Subtotal line
Distribute the return sheets to all students in treatment B (alternatively you
could announce the five period return if those in treatment B are not
present)
Ask students to update their portfolio value sheet (you may need to provide
instruction)
Ask students to fill out the investment sheet for the next 5 investment
periods and repeat the process for all 25 periods
In the first investment period, the 5-period cumulative return and the cumulative
return are equal to the current period’s return. In each succeeding line of the
instructor’s return sheet, the cumulative return is equal to the prior period’s
cumulative return multiplied by the current period’s return. The 5-period
cumulative return will be equal to the previous period’s cumulative return
multiplied by the current period’s return except following one of the subtotal lines.
On these lines, the 5-period cumulative return will be equal to that period’s return.
The total investment value for each individual student may be calculated after
completion of the exercise using the student investment sheets and the returns
sheet. If both treatments run simultaneously in the same room, it may be easiest to
use the same dice rolls to determine the outcomes each period. This will also
provide clear contrasts when a series of losses are rolled. However, the instructor
needs to ensure that groups do not communicate with one another.
Instructor’s Return Sheet
Investment A:
Investment B:
2=
8=
2=
8=
3=
9=
3=
9=
4=
10=
4=
10 =
5=
11 =
5=
11 =
6=
12 =
6=
12 =
7=
7=
Period
Investment A
Investment B
Single
5 -Period
Cumulative Single
5-Period
Cumulative
Period
Cumulative Return
Period
Cumulative Return
Return
Return
Return
Return
1
2
3
4
5
Subtotal
6
7
8
9
10
Subtotal
11
12
13
14
15
Subtotal
16
17
18
19
20
Subtotal
21
22
23
24
25
Subtotal
For the Participant:
Form A
Instruction Sheet
You will now be participating in an exercise that mimics investment in a stock
market. You are initially endowed with $10 to invest. You may invest your money in
one of two investments: Investment A and Investment B. You will be participating
in this exercise for 25 investment periods. After each period, you will be informed of
the return on investment from the previous period for each of the two investment
options, and be asked to determine the allocation of your investment between the
two options for the current investment period. All money in each period must be
invested in one of the two options. Each period you will fill out an investment sheet
and record the percentage of your portfolio that you wish to place in Investment A.
The remainder will be allocated to Investment B. Make sure that your name and the
investment period are recorded on each investment sheet you hand in.
The one period returns for each investment will be determined by the rolling
of two dice. The dice will be rolled once to determine the one period return for
Investment A, and the dice will be rolled a second time to determine the one period
return for investment B. The precise relationship between the outcome of the dice
roll and value of an investment are derived by multiplying the amount invested by
the corresponding numbers below. Thus, if $10 was invested in investment A and a
2 was rolled, the return would be 1 × $10 = 10. Any number above 1 represents a
gain, while any number below 1 represents a loss.
Investment A:
2 = 1.00
8 = 1.30
3 = 1.05
9 = 1.35
4 = 1.10
10 = 1.40
5 = 1.15
11 = 1.45
6 = 1.20
12 = 1.50
7 = 1.25
Investment B:
2 = 0.1 0
8 = 3.00
3 = 0.25
9 = 3.25
4 = 0.50
10 = 3.50
5 = 0.75
11 = 3.75
6 = 1.00
12 = 4.00
7 = 2.00
Thus, on average, investment A will yield a 25% increase in the value of an
investment each period, with a standard deviation of 12%, while investment B will
yield a 100% average increase in value each period with a standard deviation of
125%. Investment B has a higher return, but also a higher risk.
Return Sheet
Investment Period__________________
This period’s return:
Investment A ____________________
Investment B:___________________
Portfolio Value Calculation Sheet
Period
Percent
in A
Return
on A
Value of A
(=Portfolio
Value ×
Percent in A ×
Return on A)
Percent Return
in B
on B
Value of A
(=Portfolio
Value ×
Percent in B ×
Return on B)
Total
Portfolio
Value
(=Value of A +
Value of B)
10
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Form B
Instruction Sheet
You will now be participating in an exercise that mimics investment in a stock
market. You are initially endowed with $10 to invest. You may invest your money in
one of two investments: Investment A and Investment B. You will be participating
in this exercise for 25 investment periods. After each set of five investment periods,
you will be informed of the return on investment from the previous five periods for
each of the two investment options, and be asked to determine the allocation of your
investment between the two options for the next five investment periods. All money
in each period must be invested in one of the two options. For each set of 5 periods
you will fill out an investment sheet and record the percentage of your portfolio that
you wish to place in Investment A. The remainder will be allocated to Investment B.
Make sure that your name and the number of the set of investment periods (e.g., 1-5,
or 6-10, etc.) are recorded on each investment sheet you hand in.
The one period returns for each investment will be determined by the rolling
of two dice. The dice will be rolled once to determine the one period return for
Investment A, and the dice will be rolled a second time to determine the one period
return for investment B. The precise relationship between the outcome of the dice
roll and value of an investment are derived by multiplying the amount invested by
the corresponding numbers below. Thus, if $10 was invested in investment A and a
2 was rolled, the return would be 1 × $10 = 10.
Investment A:
2 = 1.00
8 = 1.30
3 = 1.05
9 = 1.35
4 = 1.10
10 = 1.40
5 = 1.15
11 = 1.45
6 = 1.20
12 = 1.50
7 = 1.25
Investment B:
2 = 0.1 0
8 = 3.00
3 = 0.25
9 = 3.25
4 = 0.50
10 = 3.50
5 = 0.75
11 = 3.75
6 = 1.00
12 = 4.00
7 = 2.00
Thus, on average, investment A will yield a 25% increase in the value of an
investment each period, with a standard deviation of 12%, while investment B will
yield a 100% average increase in value each period with a standard deviation of
125%. Investment B has a higher return, but also a higher risk.
Portfolio Value Calculation Sheet
Cumulative
Percent
Periods
Return on
in A
A
Value
of A
(=Portfolio
Value ×
Percent in
A×
Return on
A)
Cumulative
Percent
Return on
in B
B
Value
of A
(=Portfolio
Value ×
Percent in
B × Return
on B)
Total
Portfolio
Value
(=Value of A
+ Value of B)
10
1-5
6-10
11-15
16-20
21-25
Return Sheet
Investment Periods __________________
Per period returns:
Investment A:
1st ________
2nd _______
3rd _______ 4th _______ 5th _______
Investment B:
1st ________
2nd _______
3rd _______ 4th _______ 5th _______
Cumulative return:
Investment A ____________________
Investment B:___________________
Investment Sheet
Name ____________________
Investment Period___________________
Percent to Invest in A (1 to 100) __________________________
Total Value of Portfolio__________________________
Suggestions for Use in Lecture: In presenting the results of the exercise, it is best
to first present the overall average returns for those in treatment A and those in
treatment B. Usually those in treatment A will receive a higher average return. Next,
display a graph that shows investment period on the x-axis, and a line graph for
returns (one for each investment) and a third line representing the average holding
of investment B for those in treatment A. A similar graph should be displayed for
those in treatment B, displaying the period-by-period returns rather than the 5
period returns. This will allow the instructor to demonstrate the emotional
response to a one period negative return in treatment A. Alternatively the 5 period
averaging leads to less emotional response in the portfolio.
Risky Choices
(Supports Chapter 6)
Purpose: These simple questions are based upon Matthew Rabin’s calibration work
to demonstrate that individuals appear to display too much risk aversion over small
gambles.
Materials: One printed survey sheet for each student.
Preparation: Print the sheets and distribute.
For the Instructor: Ask students to fill out survey sheets. Remind them to answer
honestly. Because of the amounts of money involved, this exercise is best
administered as a survey with hypothetical questions rather than as a rewarded
experiment.
For the Participant:
Survey Sheet
This survey will ask you about a series of risky choices. While all of the questions
are hypothetical, please answer as if you would immediately face the consequences
of the gamble. In each question you will be asked whether you would be willing to
accept a particular gamble or not. Accepting the gamble would mean that you would
win or lose the amounts specified with the probabilities specified. Rejecting the
gamble would result in no change in your income. Treat each question as if none of
the gambles in prior or subsequent questions would be implemented.
1. Would you accept a gamble that gave you a 50% chance of winning $11, and
a 50% chance of losing $10?
Yes
No
2. Would you accept a gamble that gave you a 50% chance of winning $15, and
a 50% chance of losing $14?
Yes
No
3. Would you accept a gamble that gave you a 50% chance of winning $50, and
a 50% chance of losing $45?
Yes
No
4. Would you accept a gamble that gave you a 50% chance of winning $101, and
a 50% chance of losing $100?
Yes
No
5. Would you accept a gamble that gave you a 50% chance of winning $110, and
a 50% chance of losing $100?
Yes
No
6. Would you accept a gamble that gave you a 50% chance of winning $1100,
and a 50% chance of losing $1000?
Yes
No
7. Would you accept a gamble that gave you a 50% chance of winning
$1,000,000, and a 50% chance of losing $100? Yes
No
8. Would you accept a gamble that gave you a 50% chance of winning
$1,000,000, and a 50% chance of losing $196? Yes
No
9. Would you accept a gamble that gave you a 50% chance of winning
$5,000,000, and a 50% chance of losing $450? Yes
No
10. Would you accept a gamble that gave you a 50% chance of winning
$10,000,000, and a 50% chance of losing $10,000?
Yes
No
11. Would you accept a gamble that gave you a 50% chance of winning
$10,000,000, and a 50% chance of losing $1,000?
Yes
No
12. Would you accept a gamble that gave you a 50% chance of winning
$110,000,000, and a 50% chance of losing $10,000?
Yes
No
Suggestions for Use in Lecture: The questions are paired so that anyone who is
universally risk averse and rejects gamble 1 should also reject gamble 7. Anyone
who rejects gamble 2 should reject gamble 8. And so on. It is generally effective to
present the percentage of students who reject one of the first six gambles and accept
the corresponding gamble from the last six. Presenting each of these usually
generates at least two or three that are relatively prominent violations. This can
then be used to underscore the strict implications of the expected utility model.
Investments and Evaluation
(Supports Chapter 6)
Purpose: These hypothetical questions are designed to demonstrate that students
will make different decisions when presented sequentially than when decisions are
aggregated.
Materials: The instructor will need:
i) Two sets of answer sheets printed from the section below, For the
Participant
Preparation: Shuffle answer sheets so that they can be distributed randomly to
students in the class.
For the Instructor: Distribute the materials to students, and ask them to read and
answer all questions. Remind students not to discuss the questions with one
another.
For the Participant:5
Form A: Imagine that you face the following pair of concurrent decisions. First,
examine both decisions, then indicate the options you prefer.
Decision (i) Choose between:
A. A sure gain of $240
B. 25% chance to gain $1000 and 75% chance to gain nothing
Decision (ii) Choose between:
C. A sure loss of $750
D. 75% chance to lose $1000 and 25% chance to lose nothing
Form B: Imagine that you face the following decision. Examine the options, and then
indicate the options you prefer.
Choose between:
A. A sure loss of $510
5
All materials derived from Tversky A. and D. Kahneman. “Rational Choice and the
Framing of Decisions.” Journal of Business 59(1986):S251-S278.
B. 75% chance to lose $760 and a 25% chance to gain $240
C. 25% chance to gain $250 and 75% chance to lose $750
D. 56.25% chance to lose $1000, 6.25% chance to gain $1000 and 37.5%
chance to gain nothing
Suggestions for Use in Lecture: In lecture it is often easiest to begin by presenting
the questions as they appear on form A, and then demonstrating their equivalence
to the questions on form B. Afterwards, you may present the proportion of students
who chose each possible combination in form A and compare to the choices for form
B.
Investments and Evaluation
(Supports Chapter 6)
Purpose: This exercise demonstrates how individuals will seek diversity when
making many decisions simultaneously while they may actually seek uniformity
when these same decisions are broken out to their constituent parts.
Materials: The instructor will need:
i)
One set of answer sheets of type A (an example appears below in
For the Participant). You will need to fill in the three items you
decide to use on each of the forms and make sure to use these same
three items on all days. The types of items may be adjusted for the
course budget and availability of items.
ii)
You will need to print two sets of answer sheets of type B.
iii)
Small food items—usually candies of different sorts.
Preparation: This exercise takes place over three lectures and all students
participate in the same treatment. On the first day, all students need to fill out
answer sheet A indicating what treats they want for each of the next two lectures. In
the next two lectures, pass out form B and allow students to choose whichever of
the treats they like regardless of their stated intention. You will need to bring
enough of each item to ensure that all requests can be filled.
For the Instructor:
Day 1: Instruct students that you will be giving out treats the next two lectures. Ask
them to fill out their order forms so that you can make sure there is enough of each
item to fill their orders.
Day 2: Instruct the students that you have their previous order sheets, but that you
have enough on hand for them to choose whatever they like. Ask them to fill out
their order and then distribute the items.
Day 3: Instruct the students that you have enough on hand for them to choose
whatever they like. Ask them to fill out their order and then distribute the items.
For the Participant:
Form A
Name_______________
Over the next two lectures we will be having a small treat in class. Please place your
order by circling exactly one item for each of the two days.
Day 1:
___________________
______________________ _______________________
Day 2:
___________________
______________________
_______________________
Form B
Name_______________
Please select the treat you would like today by circling your selection.
___________________
______________________
_______________________
Suggestions for Use in Lecture: In lecture it is often best to present the percentage
of students who choose different items on form A and the percentage of students
who chose the same items on each of the forms B. This will usually demonstrate that
students believed they would have a greater desire for diversity than is actually
realized in later preferences.
Flipping Coins
(Supports Chapter 7)
Purpose: This exercise demonstrates the tendency individuals have to see positive
correlation where draws are indeed independent.
Materials: The instructor will need:
i.)
One set of answer sheets in For the Participant
ii.)
Small stickers that can be used to verify outcomes (you will need one
sticker for each student making a correct prediction in all rounds)
iii.)
A coin
Preparation: Pass out the answer sheets prior to beginning the exercise.
For the Instructor: Instruct participants to answer the initial question. After the
initial question is answered, then instruct the student that you will be flipping a coin
repeatedly. Each time before you flip the coin, you will ask them to predict the
outcome. They will earn $0.25 experimental dollars each time they predict it
correctly. They will lose $0.25 experimental dollars each time they predict
incorrectly. You may need to make a statement about how experimental dollars will
translate into actual dollars. Instruct students that those making a correct
prediction will be verified by either you or an assistant.
Prior to each coin toss, ask all students to first record their prediction on the sheet,
and have all predicting a heads to raise their hand and keep them raised until you
say to lower them. This will allow you so observe if any attempt to change their
answers after the toss. After each coin toss, place a sticker next to the correct
prediction on the answer sheet for all who made the right prediction.
For the Participant:
Answer Sheet
1. Using an “H” to indicate “heads” and a “T” to indicate “tails, write down a series of
results that would seem typical of the flipping of a fair coin 25 times, (e.g.,
HHTHTTH…)
2. The instructor will now begin an exercise of flipping a coin. Prior to each coin flip,
please make a prediction regarding the outcome of the flip. Do not record your
prediction until the instructor requests you to do so.
Round
1
2
3
Prediction
Actual
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
Suggestions for Use in Lecture: Generally students will be more likely to predict a
tail when a heads has just occurred and a head when a tail has just occurred.
Additionally, a long string of one outcome will induce many to predict the other
outcome. It is usually most effective to present the average percentage predicting a
head in a round in which a tail was last flipped, and the average percentage
predicting a head in a round when a head was last flipped. Additionally, it may be
useful to present a graph with the x-axis representing round, and the y-axis
representing the percentage predicting heads and marking on the graph the result
of each round. As you present the results remind the students that one coin flip
provides no information about the next coin flip.
Predicting and Inferring
(Supports Chapter 7)
Purpose: This experiment can demonstrate the representativeness heuristic-that
individuals tend to inflate the probability that what they have observed is
representative of the underlying process that generated it.
Materials: The instructor will need:
i.)
One set of answer sheets in For the Participant
ii.)
One record sheet in For the Instructor
iii.)
Two identical opaque bags
iv.)
Seven white Ping-Pong balls
v.)
Six colored Ping-Pong balls
vi.)
A six-sided die
Preparation: Prior to the beginning of class, place three white and three colored
Ping-Pong balls in the first bag, and place 4 white and 2 colored Ping-Pong balls in
the second bag. Pass out all answer sheets before the beginning of class. Ensure that
there is enough space for you to conduct all required procedures outside of the view
of students.
For the Instructor: Instruct participants to write their name on their answer sheet.
Instruct the class that you have two bags full of colored and white Ping-Pong balls.
One bag, Bag A, has three white and three colored balls, while the other, Bag B, has
four white and two colored balls. Additionally, inform them that you have a
standard six-sided die. You may wish to write this information on a whiteboard or
display it on a screen. Invite two members of the class to come forward and inspect
the two bags and confirm your description to the class. Read the following
instructions to the class: You will now participate in 10 rounds of an inference
exercise. In each round, I will draw three Ping-Pong balls from one of the bags,
which I will do outside of your view. You will then be asked to record which bag
(either A or B) you believe the balls came from, and your guess as to the probability
that I am drawing from that bag. Before drawing the Ping-Pong balls, in each round
I will select the bag to draw from by rolling the die, also outside of your view. If I roll
a 1, 2, 3 or 4, I will select Bag A. If I roll a 5 or 6, I will select Bag B. For each round in
which you predict correctly which bag I am drawing from, you will receive $0.25
experimental dollars. For each round in which you are wrong, you will lose $0.25
dollars. Ask students if they have any questions.
Begin round one by rolling the die, making sure that students cannot see the result.
Record the result of the die roll and the resulting bag on the Record Sheet. Then,
being careful that students cannot observe which bag you are using, draw three
Ping-Pong balls and display them for the students. Ask students to record their
responses for round 1. Replace the Ping-Pong Balls, and continue in a like manner
for rounds 2 through 10. Afterwards, collect the answer sheets, and then announce
the results for each round. You can then use the answer sheets and record sheet to
determine rewards. Note that you should not reveal the results of any roll until after
you have collected the answer sheets.
Record Sheet
Round
1
2
3
4
5
6
7
8
9
10
Die Roll
Bag
Draw
For the Participant:
Answer Sheet
Name_________________________
Round
1
Which bag do you believe the With what probability to
instructor is drawing from?
you believe the instructor
(Circle one)
is drawing from that bag?
(Answer
should
be
between 0 and 1)
A
B
2
A
B
3
A
B
4
A
B
5
A
B
6
A
B
7
A
B
8
A
B
9
A
B
10
A
B
Suggestions for Use in Lecture: When you happen to draw two white balls and
one colored ball, students will tend to over predict the probability that you are
drawing from Bag B. One way to illustrate this is to present the class average
predicted probabilities for each scenario of draw that occurred (three colored, one
white two colored, two white one colored and three colored) and the probabilities
that would correspond to Bayesian beliefs (the corresponding probabilities you are
drawing from Bag B are 0, 0.23, 0.37, 0.54). As well, it can be useful to display the
percent predicting Bag A and Bag B for each round, and the actual bag that was
being used.
Representativeness
(Supports Chapter 7)
Purpose: These hypothetical questions can demonstrate the representativeness
heuristic.
Materials: The instructor will need:
i.)
One set of answer sheets in For the Participant
Preparation: Pass out the answer sheets prior to beginning the exercise.
For the Instructor: Instruct students to answer the questions on their answer
sheet and hand in their sheets.
For the Participant:
Answer Sheet6
Question 1:
A cab was involved in a hit and run accident at night. Two cab companies, the
Green and the Blue, operate in the city. You are given the following data:
(a) 85 percent of the cabs in the city are Green and 15 percent are Blue
(b) A witness identified the cab as Blue,
This witness was tested under similar visibility conditions and made correct color
identifications in 80% of the trial instances. What is the probability that the cab involved
in the accident was a Blue Cab rather than a Green one?
______________ (a number between 0 and 1)
Question 2:
Bill is 34 years old. He is intelligent, but unimaginative, compulsive, and generally
lifeless. In school, he was strong in mathematics but weak in social studies and
humanities.
Please rank order the following statements by their probability, using 1 for the
most probable and 8 for the least probable.
_____ Bill is a physician who plays poker for a hobby.
_____ Bill is an architect.
_____ Bill is an accountant.
Question1 reprinted with permission from Tversky, A. and D. Kahneman. “On
Prediction and Judgment” Oregon Research Institute Bulletin (1972). Questions 2 and
3 reprinted with permission (and slight modifications) from Tversky, A. and D.
Kahneman. “Extensional Versus Intuitive Reasoning: The Conjunction Fallacy in
Probability Judgment.” Psychological Review 90(1983): page 297.
6
_____
_____
_____
_____
_____
Bill plays jazz for a hobby.
Bill surfs for a hobby.
Bill is a reporter.
Bill is an accountant who plays jazz for a hobby.
Bill climbs mountains for a hobby.
Question 3:
Linda is 31 years old, single, outspoken, and very bright. She majored in philosophy. As
a student, she was deeply concerned with issues of discrimination and social justice, and
also participated in anti-war demonstrations.
Please rank order the following statements by their probability, using 1 for the most
probable and 8 for the least probable.
_____ Linda is a teacher in elementary school.
_____ Linda works in a bookstore and takes Yoga classes.
_____ Linda is active in feminist organizations.
_____ Linda is a psychiatric social worker.
_____ Linda is a member of the League of Women Voters.
_____ Linda is a bank teller.
_____ Linda is an insurance salesperson.
_____ Linda is a bank teller and is active in feminist organizations.
Suggestions for Use in Lecture: For question 1, the instructor should present the
average predicted probability that the Blue cab was involved in the accident, and
compare this average to the probability according to Bayes rule 0.15 × 0.85/(0.15 ×
0.85 + 0.85 × 0.15) = 0.5. Note that if they assessed the probability higher than
that of Bayes rule, it was as if they were ignoring the base rate (the overall
prevalence of Blue cabs) to some extent. When presenting questions 2 and 3,
simply note average rank of each outcome. Generally students rank the compound
options (e.g., Linda is a bank teller and is active in feminist organizations) as more
probable than at least one of the components (e.g., Linda is a bank teller). Discuss
how this may come about because the compound answer is more representative of
the description of Linda than the single component.
Flipping Cards
(Supports Chapter 8)
Purpose: This simple experiment demonstrates the confirmation effect.
Materials: The instructor will need:
i.)
One set of answer sheets in For the Participant
ii.)
3” x 5” index cards (enough for each student to receive 4)
iii.)
Markers
Preparation: Before class starts, mark each card with a letter on one side and a
number on the other side. At least every fourth card should be marked with a
vowel, and every fourth card should be marked with a 5.
For the Instructor: Once class has started, distribute answer sheets. Explain to the
class that they will each receive four cards. They are not to turn the cards over. Each
card has been marked on one side with a letter and on the other side with a number.
After giving this instruction, place four cards on each student’s desk, ensuring that
each student has at least one vowel and one “5” showing. Explain to students that
you are interested in testing the hypothesis that each card marked with a vowel on
one side is marked with a “5” on the other side. Without turning the cards over,
please fill in part 1 of the answer sheet.
After all have completed part 1, instruct them to turn over only the cards they
selected and complete part 2. Once all have completed part 2, ask them to turn over
the remaining cards and, in part 3, write down anything they may have learned from
turning over these last cards with respect to the hypothesis.
For the Participant:
Answer Sheet
Name_________________________
Part 1
Please draw the markings on the four boxes below so that they resemble the cards on
your desk
In order to test the hypothesis described by the instructor, which cards would you
need to turn over (please list only those necessary to test the hypothesis)
_______________________________________________________________________
Part 2
List what is written on both sides of all cards you turned over (you will likely not fill
in all the blanks below)
1.
2.
3.
4.
Front___________
Front___________
Front___________
Front___________
Back______________
Back______________
Back______________
Back______________
Do you believe the hypothesis is true or false? ___________________
Part 3
________________________________________________________________________
Suggestions for Use in Lecture: In general you should find some prevalence of
students that will not think it is necessary to turn over any card displaying a number
other than 5. It may be useful to display a histogram of responses from part one
displaying the frequency of various cards being cited as necessary to test the
hypothesis (e.g., a bin for vowels, a bin for “5”, a bin for numbers other than 5, and a
bin for consonants). It may also be useful to display the number from part 2 who
believe the hypothesis is true. By failing to turn over numbers other than 5, students
will have a higher probability of not finding disconfirming information. Finally, it
may be useful to note the number of students in part 3 who realized they should
have turned over the other number cards.
Debate Club
(Supports Chapter 8)
Purpose: This exercise is designed to demonstrate confirmation bias and the
tendency to dispute or disregard information that is counter to one’s own beliefs.
Materials: The instructor will need:
i.)
One set of answer sheets in For the Participant
ii.)
One team sheet to record who is pro and who is anti, in For the Instructor
Preparation: Before class, the instructor will need to print one answer sheet for
each student.
For the Instructor: Once class starts, inform the class that they are going to engage
in a policy debate. Announce that one side will be arguing for the taxing of sugared
sodas (or select some other topic that is likely to generate a nearly even split within
your class) while the other side will be arguing against the tax. They are allowed to
determine which side of the debate they will be on. Ask all who wish to argue for the
tax to raise their hand, and note their names. Then note the names of those who are
opposed. Students will be given 5 minutes to prepare their own arguments. After
this 5 minutes, you will call upon 3 pro students and 3 anti students. Each will be
given 3 minutes to make their point. The debate will alternate sides with a Pro
student arguing first. All students will be asked to rate the effectiveness of each
debater and rank them in order of how convincing their arguments are. Randomly
select three students from each side after 5 minutes has passed. Remind students to
rank all debaters at the end of the exercise.
Team Sheet
Pro
Anti
For the Participant:
Answer Sheet
Name____________________________________
Debater 1 (Pro):
Strongly Agree
The arguments were accurate: 1
2
3
4
5
Strongly Disagree
6
7
The arguments were flawed: 1
2
3
4
5
6
7
He/she was effective:
1
2
3
4
5
6
7
He/she persuaded me:
1
2
3
4
5
6
7
Strongly Agree
The arguments were accurate: 1
2
3
4
5
Strongly Disagree
6
7
The arguments were flawed: 1
2
3
4
5
6
7
He/she was effective:
1
2
3
4
5
6
7
He/she persuaded me:
1
2
3
4
5
6
7
Debater 2 (Anti):
Debater 3 (Pro):
Strongly Agree
The arguments were accurate: 1
2
3
4
5
Strongly Disagree
6
7
The arguments were flawed: 1
2
3
4
5
6
7
He/she was effective:
2
3
4
5
6
7
1
He/she persuaded me:
1
2
3
4
5
6
Strongly Agree
The arguments were accurate: 1
2
3
4
5
Strongly Disagree
6
7
The arguments were flawed: 1
2
3
4
5
6
7
He/she was effective:
1
2
3
4
5
6
7
He/she persuaded me:
1
2
3
4
5
6
7
Debater 4 (Anti):
Debater 5 (Pro):
7
Strongly Agree
The arguments were accurate: 1
2
3
4
5
Strongly Disagree
6
7
The arguments were flawed: 1
2
3
4
5
6
7
He/she was effective:
1
2
3
4
5
6
7
He/she persuaded me:
1
2
3
4
5
6
7
Strongly Agree
The arguments were accurate: 1
2
3
4
5
Strongly Disagree
6
7
The arguments were flawed: 1
2
3
4
5
6
7
He/she was effective:
1
2
3
4
5
6
7
He/she persuaded me:
1
2
3
4
5
6
7
Debater 6 (Anti):
Please rank the debaters in order of their persuasiveness (most persuasive first).
Use their number to identify them.
___________
___________
___________
___________
___________
___________
Suggestions for Use in Lecture: It is most effective to display the average Likert
scale ratings for each team (pro or anti) by the pro or anti status of the rater. It is
best to present these as team averages so that a particularly poor debater is not
singled out. In general you will find that those who are pro tend to rate pro debaters
as more effective and persuasive. Additionally, it may be useful to display the
average rank of a pro or anti debater as determined by pro or anti students. These
can be simple means.
A Matter of Confidence
(Supports Chapter 8)
Purpose: This exercise is designed to demonstrate overconfidence in expressing
ones certainty regarding some general fact.
Materials: The instructor will need:
i.)
One set of answer sheets in For the Participant
Preparation: Prior to the beginning of class, the instructor will need to print an
answer sheet for each participant. The instructor is encouraged to edit the questions
listed so that some are more relevant and familiar to students and some are less so.
Questions relating to the size or function of the school they attend may be
particularly useful.
For the Instructor: Instruct the class that they will be asked to take a survey. The
survey lists several statistics without giving you the number (for example, the U.S.
GDP in 2012). For each statistic, the student is asked to give one high number such
that they believe there is only a 5% chance that the true value is above the number
you write. The student will also be asked for a low number such that there is only a
5% chance that the true value is below this low number. Ask students if they
understand the task and answer any questions they may have.
Statistic
The population of Rhode Island in 2010
Answer
1,052,567
(U.S. Census)
The percent of US voters who selected Barack Obama for 51.1
president in 2012
(New York Times)
The land area of the United States in square miles
3,537,436
(Graphic Maps)
Percent of Americans living below the poverty line in 2011
15
(U.S. Census)
Number of new houses sold in the United States in 2012
368,000
(U.S. Census)
Normal yearly snowfall in Syracuse, New York
116.9
(Nat.
Weather
Service)
Total enrollment at the University of Maryland, College Park in 26,826
Fall 2011 (undergraduate and graduate)
(umd.edu)
Average annual rainfall in Berkeley, California
25.40
(Nat.
Weather
Service)
Percent of U.S. adults who report having had an alcoholic 64% (Gallup)
beverage in the last week (July 2012)
Percent of U.S. households who report having access to the 44
internet (2010)
The elevation (in feet) of the tallest mountain in the U.S.
The elevation (in feet) of the lowest point in the U.S.
Median age of United States residents in 2010
Average in-state tuition for a public 4 year institution of higher
learning (2012)
Percent of Americans that identify themselves as Christians
(2012)
Percent of Americans that identify themselves as Catholics
(2012)
Percent of American that identify themselves as atheists
(2012)
Current national debt per capita (2012)
Amount collected by the US federal government in individual
income taxes in 2012.
Percent of total government revenues generated by individual
income taxes (2012).
(U.S. Census)
20,320
(Rand)
-282
(Rand)
37.2
(U.S. Census)
$8,655
(College Board)
77
(Gallup)
23.3
(Gallup)
5
(WIN Gallup)
$48,700
(U.S. Treasury, U.S.
Census)
$1.4 Trillion
(U.S. Treasury)
27.5
(U.S. Treasury)
For the Participant:
Answer Sheet
Definition of a 90% confidence interval: An interval that, on average, contains the
true value about 9 out of every 10 draws. You should expect that 9 out of every 10 of
the intervals you give below will contain the truth, and 1 out of every 10 will not.
The lower bound should be a value such that you believe there is a 5% chance that
the true value falls below the lower bound.
The upper bound should be a value such that you believe there is a 5% chance that
the true value falls above the upper bound.
Statistic
The population of Rhode Island in 2010
The percent of US voters who selected Barack Obama for
president in 2012
90% Confidence
Interval
Lower
Upper
Bound
Bound
The land area of the United States in square miles
Percent of Americans living below the poverty line in 2011
Number of new houses sold in the United States in 2012
Normal yearly snowfall in Syracuse, New York
Total enrollment at the University of Maryland, College Park
in Fall 2011 (undergraduate and graduate)
Average annual rainfall in Berkeley, California
Percent of U.S. adults who report having had an alcoholic
beverage in the last week (July 2012)
Percent of U.S. households who report having access to the
internet (2010)
The elevation (in feet) of the tallest mountain in the U.S.
The elevation (in feet) of the lowest point in the U.S.
Median age of United States residents in 2010
Average in-state tuition for a public 4 year institution of
higher learning (2012)
Percent of Americans that identify themselves as Christians
(2012)
Percent of Americans that identify themselves as Catholics
(2012)
Percent of American that identify themselves as atheists
(2012)
Current national debt per capita (2012)
Amount collected by the US federal government in
individual income taxes in 2012.
Percent of total government revenues generated by
individual income taxes (2012).
Suggestions for Use in Lecture: It is easiest and most effective to display the
percentage of students whose intervals contained the true value for each question.
You could also calculate an overall containing percentage. The point you should
make is that well more than 10% of the true values fall outside of the interval for
most questions. Moreover, if you have included some questions that are more
familiar to students you might see a tendency for less than 10% of the true values to
fall outside of the intervals.
Decision under Risk
(Supports Chapter 9)
Purpose: This exercise is designed to demonstrate the Allais and common ratio
paradoxes as well as preference cycling.
Materials: The instructor will need:
i.)
One set of answer sheets in For the Participant
ii.)
An opaque bag and 16 ping pong balls.
iii.)
An 10-sided die
iv.)
A probability scale sheet in For the Instructor
v.)
A highlighter pen
Preparation: Before class, number the Ping-Pong balls from 1 to 16.
For the Instructor: As class begins distribute the answer sheets to students. Once
all have their answer sheets, read the following instructions:
Please write your name on your answer sheet. On your answer sheet you are
presented with a series of choices between two gambles. Each lottery lists the
probability of receiving various amounts of money. When we begin the exercise, you
will be asked to circle your choice for each of the 16 choice problems. I have a bag
with 16 Ping-Pong balls, numbered from 1 to 16. [Display the bag and invite one
member of the class to confirm that there are 16 balls and that they are numbered
as described]. After you have completed your selections on the answer sheet, you
will have the opportunity to play one of the choices you made for experimental
dollars. The choice you play for will be selected at random. You will be asked to
draw a Ping-Pong ball from the bag. The ball you draw will determine which choice
will be played for real rewards. The result of the gamble will be determined by the
roll of an 10-sided die. [Display the die].
Ask students if they have any questions regarding the procedure. Once all questions
have been answered, ask students to begin the exercise. When each student finishes
have them draw their own Ping-Pong ball, and replace the ball and circle the
corresponding problem on the student’s answer sheet. Then have the student roll
the die, and show them the corresponding result of their gamble from the
probability scale sheet. Highlight the outcome of the gamble that resulted from the
die roll and collect the student’s sheet in order to record the monetary reward.
Probability Scale Sheet
For each of the gambles with probabilities measured in tenths, roll the die one time.
If the result of the roll is 𝐷 then define 𝑥 = 𝐷/10 and use the scale below to
determine the outcome.
For each of the gambles with probabilities measured in hundredths, roll the die
twice. If the result of the first roll is 𝐷 and the result of the second is 𝑅, first redefine
𝐷
𝑅
any result of “10” as a “0” then define 𝑥 = 10 + 100. Then use the scale below to
determine the outcome.
Gamble 1B: 𝑥 = 0.1 → $0; 0.2 ≤ 𝑥 ≤ 0.9 → $6; 𝑥 = 1.0 → $14
Gamble 2A: 0.1 ≤ 𝑥 ≤ 0.3 → $0; 0.4 ≤ 𝑥 ≤ 1.0 → $11
Gamble 3A: 0.1 ≤ 𝑥 ≤ 0.4 → $3; 0.5 ≤ 𝑥 ≤ 1.0 → $10
Gamble 4A: 0.1 ≤ 𝑥 ≤ 0.4 → $0; 0.5 ≤ 𝑥 ≤ 1.0 → $6
Gamble 4B: 0.1 ≤ 𝑥 ≤ 0.5 → $0; 0.6 ≤ 𝑥 ≤ 0.9 → $6; 𝑥 = 1.0 → $14
Gamble 5A: 0.00 ≤ 𝑥 ≤ 0.57 → $0; 0.58 ≤ 𝑥 ≤ 0.99 → $11
Gamble 6B: 0.1 ≤ 𝑥 ≤ 0.3 → $1; 0.4 ≤ 𝑥 ≤ 1.0 → $7.50
Gamble 7A: 0.1 ≤ 𝑥 ≤ 0.7 → $0; 0.8 ≤ 𝑥 ≤ 1.0 → $6
Gamble 7B: 0.1 ≤ 𝑥 ≤ 0.8 → $0; 𝑥 = 0.9 → $6; 𝑥 = 1.0 → $14
Gamble 8A: 0.00 ≤ 𝑥 ≤ 0.93 → $0; 0.94 ≤ 𝑥 ≤ 0.99 → $11
Gamble 8B: 0.1 ≤ 𝑥 ≤ 0.8 → $0; 0.9 ≤ 𝑥 ≤ 1.0 → $7
Gamble 9A: 0.1 ≤ 𝑥 ≤ 0.6 → $3; 0.7 ≤ 𝑥 ≤ 1.0 → $10
Gamble 10A: 0.1 ≤ 𝑥 ≤ 0.8 → $0; 0.9 ≤ 𝑥 ≤ 1.0 → $6
Gamble 10B: 0.1 ≤ 𝑥 ≤ 0.9 → $0; 𝑥 = 1.0 → $14
Gamble 11A: 0.00 ≤ 𝑥 ≤ 0.13 → $0; 0.14 ≤ 𝑥 ≤ 0.99 → $11
Gamble 11B: 0.1 ≤ 𝑥 ≤ 0.2 → $2; 0.3 ≤ 𝑥 ≤ 1.0 → $11
Gamble 12A: 0.1 ≤ 𝑥 ≤ 0.4 → $0; 0.5 ≤ 𝑥 ≤ 0.6 → $6; 0.7 ≤ 𝑥 ≤ 1.0 → $14
Gamble 12B: 0.1 ≤ 𝑥 ≤ 0.5 → $0; 0.6 ≤ 𝑥 ≤ 1.0 → $14
Gamble 13A: 0.1 ≤ 𝑥 ≤ 0.7 → $0; 0.8 ≤ 𝑥 ≤ 0.9 → $6; 𝑥 = 1.0 → $14
Gamble 13B: 0.1 ≤ 𝑥 ≤ 0.8 → $0; 0.9 ≤ 𝑥 ≤ 1.0 → $14
Gamble 14A: 0.00 ≤ 𝑥 ≤ 0.41 → $0; 0.42 ≤ 𝑥 ≤ 0.99 → $11
Gamble 14B: 0.1 ≤ 𝑥 ≤ 0.6 → $2; 0.7 ≤ 𝑥 ≤ 1.0 → $11
Gamble 15A: 0.1 ≤ 𝑥 ≤ 0.7 → $0; 0.8 ≤ 𝑥 ≤ 1.0 → $11
Gamble 16A: 0.1 ≤ 𝑥 ≤ 0.2 → $0; 0.3 ≤ 𝑥 ≤ 0.8 → $6; 0.9 ≤ 𝑥 ≤ 1.0 → $14
Gamble 16B: 0.1 ≤ 𝑥 ≤ 0.3 → $0; 0.4 ≤ 𝑥 ≤ 0.7 → $6; 0.8 ≤ 𝑥 ≤ 1.0 → $14
For the Participant:
Answer Sheet
Name ______________________________
Problem 1. Please circle the gamble you prefer
Gamble A
$6 with probability 1
Gamble B
$0 with probability 0.1
$6 with probability 0.8
$14 with probability 0.1
Problem 2. Please circle the gamble you prefer
Gamble A
$0 with probability 0.3
$11 with probability 0.7
Gamble B
$7 with probability 1
Problem 3. Please circle the gamble you prefer
Gamble A
$3 with probability 0.4
$10 with probability 0.6
Gamble B
$1 with probability 0.3
$7.50 with probability 0.7
Problem 4. Please circle the gamble you prefer
Gamble A
$0 with probability 0.4
$6 with probability 0.6
Gamble B
$0 with probability 0.5
$6 with probability 0.4
$14 with probability 0.1
Problem 5. Please circle the gamble you prefer
Gamble A
Gamble B
$0 with probability 0.58
$11 with probability 0.42
$0 with probability 0.4
$7 with probability 0.6
Problem 6. Please circle the gamble you prefer
Gamble A
$5 with probability 1
Gamble B
$1 with probability 0.3
$7.50 with probability 0.7
Problem 7. Please circle the gamble you prefer
Gamble A
$0 with probability 0.7
$6 with probability 0.3
Gamble B
$0 with probability 0.8
$6 with probability 0.1
$14 with probability 0.1
Problem 8. Please circle the gamble you prefer
Gamble A
$0 with probability 0.93
$11 with probability 0.07
Gamble B
$0 with probability 0.9
$7 with probability 0.1
Problem 9. Please circle the gamble you prefer
Gamble A
$3 with probability 0.6
$10 with probability 0.4
Gamble B
$5 with probability 1
Problem 10. Please circle the gamble you prefer
Gamble A
$0 with probability 0.8
$6 with probability 0.2
Gamble B
$0 with probability 0.9
$14 with probability 0.1
Problem 11. Please circle the gamble you prefer
Gamble A
$0 with probability 0.14
$11 with probability 0.86
Gamble B
$2 with probability 0.2
$11 with probability 0.8
Problem 12. Please circle the gamble you prefer
Gamble A
$0 with probability 0.4
$6 with probability 0.2
$14 with probability 0.4
Gamble B
$0 with probability 0.5
$14 with probability 0.5
Problem 13. Please circle the gamble you prefer
Gamble A
$0 with probability 0.7
$6 with probability 0.2
$14 with probability 0.1
Gamble B
$0 with probability 0.8
$14 with probability 0.2
Problem 14. Please circle the gamble you prefer
Gamble A
$0 with probability 0.42
$11 with probability 0.58
Gamble B
$2 with probability 0.6
$11 with probability 0.4
Problem 15. Please circle the gamble you prefer
Gamble A
$0 with probability 0.7
$11 with probability 0.3
Gamble B
$2 with probability 1
Problem 16. Please circle the gamble you prefer
Gamble A
$0 with probability 0.2
$6 with probability 0.6
$14 with probability 0.2
Gamble B
$0 with probability 0.3
$6 with probability 0.4
$14 with probability 0.3
Suggestions for Use in Lecture: The problems listed on the answer sheet fall into
one of three categories.
Problems 1, 4, 7, 10, 12, 13 and 16 are designed to demonstrate the common
outcome (Allais) effect. It is usually effective to select two of these problems to
work out on the board in presentation. If, without loss of generality, we let 𝑢(0) = 0,
then choosing Gamble A in any of these problems implies that 0.2 × 𝑢(6) > 0.1 ×
𝑢(14). Thus, a rational decision-maker would only choose Gamble A in each of these
problems, or always reject B in each of these Gambles. It is then useful to display the
percentage of students who violated this rule, and to display the percent choosing
Gamble A in each of these problems. It could also be useful to plot each of these
problems on the Marschak-Machina triangle to demonstrate their location and how
expected utility preferences would exclude switching between A and B between
problems. This can be easily done using a simple scatter plot in Excel using the
probabilities of the lowest and highest amounts as the x and y coordinates.
Problems 2, 5, 8, 11, 14 and 15 are designed to demonstrate the common ratio
effect. It is usually effective to select two of these problems to work out on the board
in presentation. If, without loss of generality, we let 𝑢(0) = 0, then choosing Gamble
A in either problems 2, 5 or 8 implies that 0.3 × 𝑢(11) > 𝑢(7). Thus, if one chooses
A for any of these three, one should not also choose B for any of these three.
Additionally, choosing Gamble A in problems 11, 14 or 15 implies that 0.3 ×
𝑢(11) > 𝑢(2). Thus again, anyone who chooses A for any of these three and also
select B for any of these three is in violation of expected utility. It is then useful to
display the percentage of students who violated this rule, and to display the percent
choosing Gamble A in each of these problems. It could also be useful to plot each of
these problems on the Marschak-Machina triangle to demonstrate their location and
how expected utility preferences would exclude switching between A and B
between problems.
Problems 3, 6 and 9 are designed to demonstrate preference reversals. If one
chooses Gamble B in problem 3 and Gamble A in problem 6, one should not also
choose Gamble B in problem 9. Additionally, if one chooses A in problem 3 and B in
problem 6 one should not also choose A in problem 9. In this case it is most effective
to simply demonstrate how these are intransitive choices and then display the
percentage of students who have made such inconsistent choices.
Decision under Risk
(Supports Chapter 9)
Purpose: The purpose of this exercise is to demonstrate the Ellsberg paradox.
Materials: The instructor will need:
i.)
One set of answer sheets in For the Participant
ii.)
Two opaque bags
iii.)
12 white Ping-Pong balls and 12 colored Ping-Pong balls.
Preparation: Prior to class, label the bags as “A” and “B”. Place 8 white Ping-Pong
balls and 4 colored balls in bag A. Place the remaining balls in bag B.
For the Instructor: Give each student a copy of answer sheet I and instruct him or
her to fill in his or her name. Read the following instructions: I have two bags filled
with white and colored Ping-Pong balls [display the bags]. Bag A has 8 white PingPong balls and 4 colored Ping-Pong balls [invite a student to confirm this
statement]. Bag B has white and colored Ping-Pong balls, but I will not tell you the
number of each within Bag B. You will be asked to select which bag you would like
to draw from. In a moment I will draw one Ping-Pong ball out of each bag. If I draw a
colored ball from the bag that you have selected, you will win $5 [or some other
prize]. If I draw a white ball from the bag you have selected, you will win nothing.
Write the distribution of balls in Bag A on the board so all can see. Then ask all
students to make their selection on their answer sheet. Be sure to collect these
answer sheets. Now hand out answer sheet II. Instruct them that after the first draw,
you will replace the Ping-Pong balls and draw a second ball from each bag. This
time, however, participants will receive $5 if a white ball is drawn. Ask them to
record their preference on answer sheet II. Be sure to collect these sheets prior to
drawing Ping-Pong balls so that students cannot change their answer. You may
decide to run this experiment more than once and experiment with the distribution
of balls in the known bag.
For the Participant:
Answer Sheet I
Name ______________________________
You will be rewarded if a colored ball is drawn from the bag you choose. If a white
ball is drawn from the bag you choose, you will receive nothing. Please select which
bag you would like to be rewarded based upon. Please circle one
Bag A
8 white
4 colored
Bag B
?
Answer Sheet II
Name ______________________________
You will be rewarded if a white ball is drawn from the bag you choose. If a colored
ball is drawn from the bag you choose, you will receive nothing. Please select which
bag you would like to be rewarded based upon. Please circle one
Bag A
8 white
4 colored
Bag B
?
Suggestions for Use in Lecture: Students will be curious to know the distribution
of balls in Bag B. It may be useful to first tell them what the distribution was. Then,
report the percentage of those who chose Bag A in round I and in round II. These
responses are likely to be inconsistent with the notion that they have a fixed belief
about the distribution of balls in Bag B.
Gains and Losses
(Supports Chapter 10)
Purpose: The purpose of this exercise is to demonstrate the reflection effect.
Materials: The instructor will need:
i.)
One set of answer sheets in For the Participant
ii.)
An opaque bag and 8 Ping-pong balls.
iii.)
An 10-sided die
iv.)
A probability scale sheet in For the Instructor
v.)
A highlighter pen
Preparation: Before class, number the Ping-Pong balls from 1 to 8.
For the Instructor: As class begins distribute the answer sheets to students. Once
all have their answer sheets, read the following instructions:
Please write your name on your answer sheet. On your answer sheet you are
presented with a series of choices between two gambles. Each lottery lists the
probability of receiving various amounts of money. When we begin the exercise, you
will be asked to circle your choice for each of the 8 choice problems. I have a bag
with 8 Ping-Pong balls, numbered from 1 to 8. [Display the bag and invite one
member of the class to confirm that there are 8 balls and that they are numbered as
described]. After you have completed your selections on the answer sheet, you will
have the opportunity to play one of the choices you made for experimental dollars.
The choice you play for will be selected at random. You will be asked to draw a PingPong ball from the bag. The ball you draw will determine which choice will be
played for real rewards. The result of the gamble will be determined by the roll of
an 10-sided die. [Display the die].
Ask students if they have any questions regarding the procedure. Once all questions
have been answered, ask students to begin the exercise. When each student finishes
have them draw their own Ping-Pong ball, and replace the ball and circle the
corresponding problem on the student’s answer sheet. Then have the student roll
the die, and show them the corresponding result of their gamble from the
probability scale sheet. Highlight the outcome of the gamble that resulted from the
die roll and collect the student’s sheet in order to record the monetary reward.
Before administering this exercise, you should be sure that all students could
sustain the potential losses listed (for example, if all have earned at least $30
experimental dollars throughout the semester). If not, you may need to either
endow each with enough experimental money to allow the exercise, or instead make
the experiment hypothetical.
Probability Scale Sheet
For each of the gambles with probabilities measured in tenths, roll the die one time.
If the result of the roll is 𝐷 then define 𝑥 = 𝐷/10 and use the scale below to
determine the outcome.
For each of the gambles with probabilities measured in hundredths, roll the die
twice. If the result of the first roll is 𝐷 and the result of the second is 𝑅, first redefine
𝐷
𝑅
any result of “10” as a “0” then define 𝑥 = 10 + 100. Then use the scale below to
determine the outcome.
Gamble 1A: 0.1 ≤ 𝑥 ≤ 0.2 → $0; 0.3 ≤ 𝑥 ≤ 1.0 → $20
Gamble 2A: 0.00 ≤ 𝑥 ≤ 0.97 → $0; 0.98 ≤ 𝑥 ≤ 0.99 → −$15
Gamble 2B: 0.00 ≤ 𝑥 ≤ 0.98 → $0; 𝑥 = 0.99 → −$30
Gamble 3A: 0.1 ≤ 𝑥 ≤ 0.8 → $0; 0.9 ≤ 𝑥 ≤ 1.0 → $20
Gamble 3B: 0.00 ≤ 𝑥 ≤ 0.74 → $0; 0.75 ≤ 𝑥 ≤ 0.99 → $15
Gamble 4A: 𝑥 = 0.1 → $0; 0.2 ≤ 𝑥 ≤ 1.0 → −$15
Gamble 4B: 0.00 ≤ 𝑥 ≤ 0.54 → $0; 0.55 ≤ 𝑥 ≤ 0.99 → −$30
Gamble 5A: 𝑥 = 0.1 → $0; 0.2 ≤ 𝑥 ≤ 1.0 → $15
Gamble 5B: 0.00 ≤ 𝑥 ≤ 0.54 → $0; 0.55 ≤ 𝑥 ≤ 0.99 → $30
Gamble 6A: 0.1 ≤ 𝑥 ≤ 0.8 → $0; 0.9 ≤ 𝑥 ≤ 1.0 → −$20
Gamble 6B: 0.00 ≤ 𝑥 ≤ 0.74 → $0; 0.75 ≤ 𝑥 ≤ 0.99 → −$15
Gamble 7A: 0.00 ≤ 𝑥 ≤ 0.97 → $0; 0.98 ≤ 𝑥 ≤ 0.99 → $15
Gamble 7B: 0.00 ≤ 𝑥 ≤ 0.98 → $0; 𝑥 = 0.99 → $30
Gamble 8A: 0.1 ≤ 𝑥 ≤ 0.2 → $0; 0.3 ≤ 𝑥 ≤ 1.0 → −$20
For the Participant:
Answer Sheet
Name ______________________________
Problem 1. Please circle the gamble you prefer
Gamble A
$0 with probability 0.2
$20 with probability 0.8
Gamble B
$15 with probability 1
Problem 2. Please circle the gamble you prefer
Gamble A
$0 with probability 0.98
−$15 with probability 0.02
Gamble B
$0 with probability 0.99
−$30 with probability 0.01
Problem 3. Please circle the gamble you prefer
Gamble A
$0 with probability 0.8
$20 with probability 0.2
Gamble B
$0 with probability 0.75
$15 with probability 0.25
Problem 4. Please circle the gamble you prefer
Gamble A
$0 with probability 0.1
−$15 with probability 0.9
Gamble B
$0 with probability 0.55
−$30 with probability 0.45
Problem 5. Please circle the gamble you prefer
Gamble A
$0 with probability 0.1
$15 with probability 0.9
Gamble B
$0 with probability 0.55
$30 with probability 0.45
Problem 6. Please circle the gamble you prefer
Gamble A
$0 with probability 0.8
−$20 with probability 0.2
Gamble B
$0 with probability 0.75
−$15 with probability 0.25
Problem 7. Please circle the gamble you prefer
Gamble A
$0 with probability 0.98
$15 with probability 0.02
Gamble B
$0 with probability 0.99
$30 with probability 0.01
Problem 8. Please circle the gamble you prefer
Gamble A
$0 with probability 0.2
−$20 with probability 0.8
Gamble B
−$15 with probability 1
Suggestions for Use in Lecture: Each of the problems corresponds to another
problem that is identical except that the values that can be won are multiplied by
−1. Students will have a tendency to switch their preferences between the positive
(gain) gambles and the negative (loss) gambles. In most cases, students will behave
as if risk averse over gains and risk loving over losses. To demonstrate this, first
note which problems correspond to one another (e.g., Problem 1 and Problem 8,
Problem 2 and Problem 7, Problem 3 and Problem 6, Problem 4 and Problem 5).
Then display the percentage choosing Gamble A in each problem pointing out the
differences within the corresponding pairs. It may be useful to point out which of
the pairs are more risk averse (e.g., Gamble B in Problem 1 and Gamble B in Problem
8).
What and When to Eat
(Supports Chapter11)
Purpose: The purpose of this exercise is to demonstrate hot-cold empathy gap.
Materials: This exercise must take place over two or more classes. In the first class,
the instructor will need:
i.)
One bag of candy bars. These should be relatively filling and rich
candy bars.
ii.)
A set of answer sheets found in For the Participant
In the second class, the instructor will need:
i.)
Enough candy bars to fill the orders from the previous class.
ii.)
Enough of a lighter snack to fill the orders from the previous class.
This lighter snack can be something like a fruit, or crackers.
Preparation: Count out enough candy bars to give them to one half of the class
prior to the first lecture. Arrive early for the lecture. Prior to the second lecture
count out enough of each snack to fill the orders from the previous lecture.
For the Instructor: In the first class, reward the first half of students that arrive
with a candy bar. Instruct them that you will only give it to them if they will eat it
before class starts. Record the name of each student who takes a candy bar. Once
class starts, pass out the answer sheets and ask students to fill them in. Explain that
next class you will be handing out some food and that students need to place their
order. In the next class, simply fill the orders that were placed previously.
For the Participant:
Answer Sheet
Name _______________________
Next lecture, we will be having some food in lecture. Would you rather have (circle
one)
A candy bar [fill in brand and description of size]
A healthy snack [fill in alternate lighter snack, with size and description]
Suggestions for Use in Lecture: Students who had a filling candy bar will be less
likely to choose a filling candy bar for the next class because they feel less hungry
when ordering. Explain that some students were given a candy bar prior to class.
Then display the percentage choosing each option conditioned on whether they
received a candy bar or not.
The Consequences of War
(Supports Chapter11)
Purpose: The purpose of this exercise is to demonstrate hindsight bias.
Materials: The instructor will need:
i.)
A set of form I answer sheets found in For the Participant (enough for
half of the students)
ii.)
A set of form II answer sheets found in For the Participant (enough for
half of the students)
Preparation: Shuffle the answer sheets before distribution.
For the Instructor: Instruct students to fill out the answer sheets by circling the
outcome they would guess to be the most probable outcome.
For the Participant: 7
Answer Sheet (Form I)
Consider a British campaign in 1814 against a group of Nepalese. One text describes the
conflict this way:
“For some years after the arrival of Hastings as governor-general of India, the
consolidation of British power involved serious war. The first of these wars took place on
the northern frontier of Bengal where the British were faced by the plundering raids of
the Gurkas of Nepal. Attempts had been made to stop the raids by an exchange of lands,
but the Gurkas would not give up their claims to country under British control, and
Hastings decided to deal with them once and for all. The campaign began in November,
1814. It was not glorious. The Gurkas were only some 12,000 strong; but they were brave
fighters, fighting in territory well-suited to their raiding tactics. The older British
commanders were used to war in the plains where the enemy ran away from a resolute
attack. In the mountains of Nepal it was not easy even to find the enemy. The troops and
transport animals suffered from the extremes of heat and cold, and the officers learned
caution only after sharp reverses. Major-General Sir D. Octerlony was the one
commander to escape from these minor defeats.”
Given this history, would you guess the conflict to result in:
(a) British victory
(b) Gurka victory
The quote is reprinted with permission from
Woodard, E.L. Age of Reform London: Oxford University Press, 1938, 383-384. The
question is reprinted with permission from
Fischoff, B. “Hindsight≠ Foresight: The Effect of Outcome Knowledge
on Judgment Under Uncertaintly. Journal of Experimental Psychology: Human
Perception and Performance 1(1975): 288-299.
7
(c) military stalemate with no peace settlement, or
(d) military stalemate with a peace settlement.
Answer Sheet (Form II)
Consider a British campaign in 1814 against a group of Nepalese that resulted in Nepal
ceding one third of their territory to the British. One text describes the conflict this way:
“For some years after the arrival of Hastings as governor-general of India, the
consolidation of British power involved serious war. The first of these wars took place on
the northern frontier of Bengal where the British were faced by the plundering raids of
the Gurkas of Nepal. Attempts had been made to stop the raids by an exchange of lands,
but the Gurkas would not give up their claims to country under British control, and
Hastings decided to deal with them once and for all. The campaign began in November
1814. It was not glorious. The Gurkas were only some 12,000 strong; but they were brave
fighters, fighting in territory well-suited to their raiding tactics. The older British
commanders were used to war in the plains where the enemy ran away from a resolute
attack. In the mountains of Nepal it was not easy even to find the enemy. The troops and
transport animals suffered from the extremes of heat and cold, and the officers learned
caution only after sharp reverses. Major-General Sir D. Octerlony was the one
commander to escape from these minor defeats.”
Given this history (pretending you did not know the outcome), would you guess the
conflict to result in:
(a) British victory
(b) Gurka victory
(c) military stalemate with no peace settlement, or
(d) military stalemate with a peace settlement.
Suggestions for Use in Lecture: In lecture, display the two answer sheets so that
students can see the subtle difference between the two. Then simply display the
percentage choosing each outcome conditioned on which form they received. There
will generally be a higher percentage choosing option (a) when reading form II.
Apples and Oranges
(Supports Chapter 12)
Purpose: The purpose of this exercise is to demonstrate present biased preferences
and potentially the asymmetry between gains and losses. This is usually best
conducted earlier in the semester.
Materials: The instructor will need:
i.)
A set of form I answer sheets found in For the Participant (enough for
half of the students)
ii.)
A set of form II answer sheets found in For the Participant (enough for
half of the students)
iii.)
Candy bars (or some other treat)—enough to provide the necessary
rewards.
iv.)
A fair coin.
Preparation: Print answer sheets and shuffle them so that they may be easily
assigned randomly.
For the Instructor: Distribute answer sheets to the class so that half receives form
I and half receives form II. Instruct them to write their name on their answer sheet.
Read the following instructions: On your answer sheet, you are presented with three
questions. The first question is hypothetical and will not result in any reward. The
second and third questions may result in a real reward. In each you are asked to
choose between different amounts of candy bars at different points of time. [Display
the candy bars so the class knows they are real.] After you have made your selection
for both questions 2 and 3, I will flip a coin to determine whether we will implement
your answer to question 2 or question 3. Heads will result in question 2, and tails
will result in question three. Please fill out your answer sheets now.
After all have filled out their answers, collect the sheets and flip the coin so all can
see. Then, provide the resulting reward at the specified time.
For the Participant:
Answer Sheet (Form I)
Question 1: Suppose you bought a tablet computer on an installment plan. You are
required to make two payments: one this week and one six months from now.
Which would you prefer? (circle one)
A. A payment this week of $320 and a later payment of $220
B. A payment this week of $230 and a later payment of $320
Question 2: Which would you prefer? (circle one)
A. One candy bar today.
B. Two candy bars next lecture.
Question 3: Which would you prefer? (circle one)
A. One candy bar in the second to last lecture of the semester.
B. Two candy bars on the last lecture of the semester.
Answer Sheet (Form II)
Question 1: Suppose you bought a tablet computer on an installment plan. You must
make two payments of $400: one this week and one six months from now. However,
a sale has just been announced that will apply to your purchase retroactively. Which
would you prefer? (circle one)
A. A rebate of $80 on the payment this week and a rebate of $180 on the later
payment.
B. A rebate of $170 on the payment this week and a rebate of $80 on the later
payment.
Question 2: Which would you prefer? (circle one)
A. One candy bar today.
B. Two candy bars next lecture.
Question 3: Which would you prefer? (circle one)
A. One candy bar in the second to last lecture of the semester.
B. Two candy bars on the last lecture of the semester.
Suggestions for Use in Lecture: For question 1, Form I frames the cost of the
tablet as a loss while Form II uses the rebate to frame the cost as a gain. Typically,
you will observe students preferring to delay the cost when framed as a loss rather
than when framed as a gain. It may be useful to simply present the percentages in
each condition choosing A and B. For questions 2 and 3, again present the
percentage of students choosing each outcome (forms I and II are the same for these
questions). In general, more will choose A for question I while more will choose B
for question 3. These responses are inconsistent with the exponential discounting
model that are commonly used in economics. It may be useful to present the
percentage that make this inconsistent set of choices.
Turn-it-in Now or Whenever
(Supports Chapter 13)
Purpose: The purpose of this exercise is to demonstrate the tendency to
procrastinate and the willingness of individuals to use commitment mechanisms to
enforce good behavior. This exercise is best assigned at the beginning of the
semester.
Materials: None
Preparation: On the first day of class, assign each student to write a paper
demonstrating the importance of a behavioral economic concept in a current policy
or other issue in the news. Randomly assign students to one of two conditions
alphabetically based upon their first name. One half will be required to turn their
paper in on a date roughly half way through the semester. The other half are
allowed to choose their due date. However, this date must be before the date you
intend to lecture on commitment mechanisms. All will face a 1% penalty per day the
assignment is late. They must tell you the day they choose for their due date before
the next lecture.
Suggestions for Use in Lecture: In most cases, students who had the date imposed
upon them perform better than those who choose their date. Moreover, those who
choose their date usually do not choose the last possible date. In lecture it can be
effective to note the distribution of dates chosen, and the average scores of both
groups.
Dictator Games
(Supports Chapter 14)
Purpose: The purpose of this game is to demonstrate the prevalence of other
regarding preferences.
Materials: The instructor will need:
i.)
A set of answer sheets found in For the Participant
Preparation: Print all answer sheets. Prior to the start of class, use the class list to
assign half of students to group 1 and half to group 2. Also assign each participant to
two distinct pairs involving one student from group 1 and one from group 2.
For the Instructor: As students enter class, distribute the answer sheets (one for
each student) only to those in group 1. Inform students of which group they belong
to, and ask them to sit with their first assigned pair.
Read the following instructions: You have been placed in pairs in order to play a
game. Please fill in the names on your answer sheet. Those in group 1 have been
given $10 that they may divide with their partner who is from group 2. Those in
group 1 please fill in your answer sheet indicating how much of the $10, if any, you
would like to share with your partner.
After all have filled in their sheets, collect the answer sheets. Instruct partners to sit
with their second assigned pair and distribute answer sheets to those in group 2.
Now read the following instructions: Those in group 2 have now been given $10 that
they may divide with their partner who is from group 1. Those in group 2 please fill
in your answer sheet indicating how much of the $10, if any, you would like to share
with your partner.
For the Participant:
Answer Sheet
Name (Group 1) _________________________
Name of partner (Group 2)_____________________________
How much of the $10 do you wish to give to your partner? $______________________
Suggestions for Use in Lecture: In lecture it can be useful to simply present the
histogram of amounts given to partners. In almost all cases, students will give their
partner more than $0 indicating they may regard the preferences of their partner in
addition to their own. Also, you may find that many decide on an even split of the
money.
Take it or Leave it Game
(Supports Chapter 14)
Purpose: The purpose of this game is to demonstrate that individuals behave as if
they are unselfish.
Materials: The instructor will need:
i.)
A set of answer sheets found in For the Participant (enough for half the
class for each round desired).
Preparation: Before class, determine the names of pairs which will play each other
at the game and which role they will play (player 1 or player 2). If you decide to run
more than one round, you should determine a new set of pairs for each round.
For the Instructor: Once students enter the class, inform them of the pairing they
will be playing in and the role they will play. Instruct them to sit together as a pair.
Give one answer sheet to each player 1. Instruct each pair to write their names at
the top of the answer sheet, and to sign their initials next to their name. Read the
following instructions: You are now asked to play a game called “Take it or Leave it.”
A diagram on your answer sheet describes the rewards that will be earned
depending on the actions of the players. For example, at the beginning of the game,
player 1 has a choice to either ‘Take’, labeled “T”, or to ‘Leave’, labeled “L”. If player 1
takes it, then he will receive $0.40 and player 2 will receive $0.10 and the game is
over. If player 1 leaves it, then it is player 2’s turn. If at that point player 2 takes it,
player 2 will receive $0.80 and player 1 will receive $0.20 and the game is over. If
player 2 leaves it, then it will be player 1’s turn. Ultimately if all players decide to
leave it each time they get a turn, then player 1 will receive $25.60 and player 2 will
receive $6.40 after each player has had three turns and the game will end. The game
will always end if any player decides to take it. We will play in the following way.
When it is your turn, circle your decision and sign your initials on the space next to
that turn. If your choice results in the other player taking the next turn, then pass
the sheet to them. When your game has ended, raise your hands and we will collect
your sheet.
If you wish to run multiple rounds of the game, repair students for another round
after all have finished a game.
For the Participant: 8
Answer Sheet
Name (Player 1) ____________________ Initial ____________
This version of the TIOLI game is due to McKelvey, R.D. and T.R. Palfrey. “An
Experimental Study of the Centipede Game.” Econometrica 60(1992):803-836.
8
Name (Player 2) ____________________ Initial ____________
First turn:
Player 1: Take It
Player 1= $0.40
Player 2 = $0.10
Leave It
Player 2’s turn
_______________
Player 1 Initials
Second turn:
Player 2: Take It
Player 1= $0.20
Player 2 = $0.80
Leave It
Player 1’s turn
_______________
Player 2 Initials
Third turn:
Player 1: Take It
Player 1= $1.60
Player 2 = $0.40
Leave It
Player 2’s turn
_______________
Player 1 Initials
Fourth turn:
Player 2: Take It
Player 1= $0.80
Player 2 = $3.20
Leave It
Player 1’s turn
_______________
Player 2 Initials
Fifth turn:
Player 1: Take It
Player 1= $6.40
Player 2 = $1.60
Leave It
Player 2’s turn
_______________
Player 1 Initials
Leave It
Player 1= $25.60
Player 2 = $6.40
_______________
Player 2 Initials
Sixth turn:
Player 2: Take It
Player 1= $3.20
Player 2 = $12.80
Suggestions for Use in Lecture: In lecture it is generally useful first to
demonstrate the Subgame Perfect Nash equilibrium strategy that results in both
players taking at every opportunity. Then report number of games that ended in
each turn. This demonstrates that individuals allowed the pot to grow before taking.
Giving Ultimatums
(Supports Chapter 15)
Purpose: The purpose of this game is to demonstrate preferences for fairness.
Materials: The instructor will need:
i.)
A set of answer sheets found in For the Participant
Preparation: Print all answer sheets. Prior to the start of class, use the class list to
assign half of students to group 1 and half to group 2. Also assign each participant to
two distinct pairs involving one student from group 1 and one from group 2.
For the Instructor: As students enter class, distribute the answer sheets (one for
each student) only to those in group 1. Inform students of which group they belong
to, and ask them to sit with their first assigned pair.
Read the following instructions: You have been placed in pairs in order to play a
game. Please fill in the names on your answer sheet and have each player sign their
initials next to their names. Those in group 1 will take the first turn and must
propose a way to share $10 with their partner who is from group 2. After the player
from group 1 proposes a split, the player from group 2 will have the opportunity to
either accept or reject the proposed split. If the split is accepted, the player in group
2 will receive the amount the first player proposed, and the first player will retain
the rest of the $10. If the player in group 2 rejects the offer, neither player will
receive any money. Are there any questions regarding the way this game is played?
Once all questions have been answered, instruct those in group 1 to fill in their
answer sheet indicating how much of the $10, if any, they propose to share with
their partner, and to initial next to their proposal. Once they have proposed and
initialed, instruct them to pass their answer sheet to their partner. The instruct
those in group 2 to either accept or reject the offer and to initial next to their
decision. After all have completed this exercise, collect all answer sheets.
Instruct partners to sit with their second assigned pair and distribute answer sheets
to those in group 2. Instruct students to repeat the process, only with the roles of
the groups switched.
For the Participant:
Answer Sheet
Name (Group 1) _________________________
Initial ___________
Name of partner (Group 2)_____________________________ Initial ___________
Group 1: How much of the $10 do you propose to give to your partner?
$______________________ Initial ___________
Group 2: Do you: Accept
Reject
Initial__________
Suggestions for Use in Lecture: In lecture it can be useful to simply present the
histogram of amounts proposed to share, the number of rejected offers and the
amounts of the rejected offers. In many cases, the second player will reject the offer
if it appears too small, even if it means giving up money.
Fairness
(Supports Chapter 15)
Purpose: The purpose of this exercise is to demonstrate how fairness may limit firm
behavior (Based on Kahneman, Knetsch and Thaler, 1986)
Materials: The instructor will need:
i.)
A set of answer sheets found in For the Participant (half of Form I and
half of Form II)
Preparation: Prepare answer sheets for distribution by shuffling answer form so
that students will be randomly assigned to receive either Form I or Form II.
For the Instructor: Distribute the answer sheets and ask students to fill out the
survey questions.
For the Participant: 9
Answer Sheet (Form I)
Name____________________________
Please circle your answers to each of the survey questions below.
1. A hardware store has been selling snow shovels for $15. The morning after a
large snowstorm, the store raises the price to $20. Please rate this action as:
Completely Fair
Acceptable
Unfair Very Unfair
2. A small photocopying shop has one employee who has worked in the shop
for six months and earns $12 per hour. Business continues to be satisfactory,
but a factory in the area has closed and unemployment has increased. Other
small shops have now hired reliable workers at $9 an hour to perform jobs
similar to those done by the photocopy shop employee. The owner of the
photocopying shop reduces the employee’s wage to $9.
Completely Fair
Acceptable
Unfair Very Unfair
3. A house painter employs two assistants and pays them $12 per hour. The
painter decides to quit house painting and go into the business of providing
landscape services, where the going wage is lower. He reduces the workers’
wages to $9 per hour for the landscaping work.
Completely Fair
Acceptable
Unfair Very Unfair
This exercise is reprinted with permission from Kahneman, D., J.L. Knetsch and R.
Thaler. “Fairness as a Constraint on Profit Seeking: Entitlements in the Market.”
American Economic Review 76(1986):728-741.
9
4. A company is making a small profit. It is located in a community experiencing
a recession with substantial unemployment but no inflation. There are many
workers anxious to work at the company. The company decides to decrease
wages and salaries 7% this year.
Completely Fair
Acceptable
Unfair Very Unfair
5. A shortage has developed for a popular model of automobile, and customers
must now wait two months for delivery. A dealer has been selling these cars
at list price. Now the dealer prices this model $200 above list price.
Completely Fair
Acceptable
Unfair Very Unfair
6. A small company employs several people. The workers’ incomes have been
about average for the community. In recent months, business for the
company has not increased as it had before. The owners reduce the workers’
wages by 10% for the next year.
Completely Fair
Acceptable
Unfair Very Unfair
7. Suppose that, due to a transportation mixup, there is a local shortage of
lettuce and the wholesale price has increased. A local grocer has bought the
usual quantity of lettuce at a price that is 30 cents per head higher than
normal. The grocer raises the price of lettuce to customers by 30 cents per
head.
Completely Fair
Acceptable
Unfair Very Unfair
8. A landlord owns and rents out a single small house to a tenant who is living
on a fixed income. A higher rent would mean the tenant would have to move.
Other small rental houses are available. The landlord’s costs have increased
substantially over the past year and the landlord raises the rent to cover the
cost increases when the tenant’s lease is due for renewal.
Completely Fair
Acceptable
Unfair Very Unfair
9. A small company employs several workers and has been paying them
average wages. There is severe unemployment in the area and the company
could easily replace its current employees with good workers at a lower
wage. The company has been making money. The owners reduce the current
workers’ wages by 5%.
Completely Fair
Acceptable
Unfair Very Unfair
10. A grocery store has several months supply of peanut butter in stock which it
has on the shelves and in the storeroom. The owner hears that the wholesale
price of peanut butter has increased and immediately raises the price on the
current stock of peanut butter.
Completely Fair
Acceptable
Unfair Very Unfair
11. A small factory produces tables and sells all that it can make at $200 each.
Because of changes in the price of materials, the cost of making each table
has recently decreased by $40. The factory reduces its price for the tables by
$20.
Completely Fair
Acceptable
Unfair Very Unfair
12. A severe shortage of Red Delicious apples has developed in a community and
none of the grocery stores or produce markets have any of this type of apple
on their shelves. Other varieties of apples are plentiful in all of the stores. One
grocer receives a single shipment of Red Delicious apples at the regular
wholesale cost and raises the retail price of these Red Delicious apples by
25% over the regular price.
Completely Fair
Acceptable
Unfair Very Unfair
13. A grocery chain has stores in many communities. Most
competition from other groceries. In one community the
competition. Although its costs and volume of sales are the
elsewhere, the chain sets prices that average 5% higher
communities.
Completely Fair
Acceptable
of them face
chain has no
same there as
than in other
Unfair Very Unfair
14. A landlord rents out a small house. When the lease is due for renewal, the
landlord learns that the tenant has taken a job very close to the house and is
therefore unlikely to move. The landlord raises the rent $40 per month more
than he was planning to do.
Completely Fair
Acceptable
Unfair Very Unfair
15. A store has been sold out of a popular toy for a month. A week before
Christmas a single box of the toy is discovered in a storeroom. The managers
know that many customers would like to buy the toy. They announce over
the store’s public address system that the toy will be sold by auction to the
customer who offers to pay the most.
Completely Fair
Acceptable
Unfair Very Unfair
16. A business in a community with high unemployment needs to hire a new
computer operator. Four candidates are judged to be completely qualified for
the job. The manager asks the candidates to state the lowest salary they
would be willing to accept and then hires the one who demands the lowest
salary.
Completely Fair
Acceptable
Unfair Very Unfair
Answer Sheet (Form II)
Name____________________________
Please circle your answers to each of the survey questions below.
1. A hardware store has been selling snow shovels for $15. The morning after a
large snowstorm, the store raises the price to $20. Please rate this action as:
Completely Fair
Acceptable
Unfair Very Unfair
2. A small photocopying shop has one employee who has worked in the shop
for six months and earns $12 per hour. Business continues to be satisfactory,
but a factory in the area has closed and unemployment has increased. Other
small shops have now hired reliable workers at $9 an hour to perform jobs
similar to those done by the photocopy shop employee. The current
employee leaves, and the owner of the photocopying shop decides to pay a
replacement employee $9 an hour.
Completely Fair
Acceptable
Unfair Very Unfair
3. A house painter employs two assistants and pays them $12 per hour. The
painter decides to quit house painting and go into the business of providing
landscape services, where the going wage is lower. He reduces the workers’
wages to $9 per hour for the landscaping work.
Completely Fair
Acceptable
Unfair Very Unfair
4. A company is making a small profit. It is located in a community experiencing
a recession with substantial unemployment and inflation of 12%. The
company decides to increase salaries only 5% this year.
Completely Fair
Acceptable
Unfair Very Unfair
5. A shortage has developed for a popular model of automobile, and customers
must now wait two months for delivery. A dealer has been selling these cars
at a discount of $200 below list price. Now the dealer sells this model only at
list price.
Completely Fair
Acceptable
Unfair Very Unfair
6. A small company employs several people. The workers’ have been receiving
a 10% annual bonus each year and their total incomes have been about
average for the community. In recent months, business for the company has
not increased as it had before. The owners eliminate the workers’ bonus for
the year.
Completely Fair
Acceptable
Unfair Very Unfair
7. Suppose that, due to a transportation mixup, there is a local shortage of
lettuce and the wholesale price has increased. A local grocer has bought the
usual quantity of lettuce at a price that is 30 cents per head higher than
normal. The grocer raises the price of lettuce to customers by 30 cents per
head.
Completely Fair
Acceptable
Unfair Very Unfair
8. A landlord owns and rents out a single small house to a tenant who is living
on a fixed income. A higher rent would mean the tenant would have to move.
Other small rental houses are available. The landlord’s costs have increased
substantially over the past year and the landlord raises the rent to cover the
cost increases when the tenant’s lease is due for renewal.
Completely Fair
Acceptable
Unfair Very Unfair
9. A small company employs several workers and has been paying them
average wages. There is severe unemployment in the area and the company
could easily replace its current employees with good workers at a lower
wage. The company has been losing money. The owners reduce the current
workers’ wages by 5%.
Completely Fair
Acceptable
Unfair Very Unfair
10. A grocery store has several months supply of peanut butter in stock which it
has on the shelves and in the storeroom. The owner hears that the wholesale
price of peanut butter has increased and immediately raises the price on the
current stock of peanut butter.
Completely Fair
Acceptable
Unfair Very Unfair
11. A small factory produces tables and sells all that it can make at $200 each.
Because of changes in the price of materials, the cost of making each table
has recently decreased by $20. The factory does not change the price for the
tables.
Completely Fair
Acceptable
Unfair Very Unfair
12. A severe shortage of Red Delicious apples has developed in a community and
none of the grocery stores or produce markets have any of this type of apple
on their shelves. Other varieties of apples are plentiful in all of the stores. One
grocer receives a single shipment of Red Delicious apples at the regular
wholesale cost and raises the retail price of these Red Delicious apples by
25% over the regular price.
Completely Fair
Acceptable
Unfair Very Unfair
13. A grocery chain has stores in many communities. Most
competition from other groceries. In one community the
competition. Although its costs and volume of sales are the
elsewhere, the chain sets prices that average 5% higher
communities.
Completely Fair
Acceptable
of them face
chain has no
same there as
than in other
Unfair Very Unfair
14. A landlord rents out a small house. When the lease is due for renewal, the
landlord learns that the tenant has taken a job very close to the house and is
therefore unlikely to move. The landlord raises the rent $40 per month more
than he was planning to do.
Completely Fair
Acceptable
Unfair Very Unfair
15. A store has been sold out of a popular toy for a month. A week before
Christmas a single box of the toy is discovered in a storeroom. The managers
know that many customers would like to buy the toy. They announce over
the store’s public address system that the toy will be sold by auction to the
customer who offers to pay the most.
Completely Fair
Acceptable
Unfair Very Unfair
16. A business in a community with high unemployment needs to hire a new
computer operator. Four candidates are judged to be completely qualified for
the job. The manager asks the candidates to state the lowest salary they
would be willing to accept and then hires the one who demands the lowest
salary.
Completely Fair
Acceptable
Unfair Very Unfair
Suggestions for Use in Lecture: In lecture it can be useful to select several of the
questions and display the percentage selecting each option for these questions.
Display and read the questions as you discuss them. For paired questions (2, 4, 5, 6,
9 and 11) it will be useful to display both questions at once and discuss their subtle
difference. In each case it can be useful to demonstrate how these questions
demonstrate the rules of fairness that seem to be ingrained in how we perceive the
market.
A Matter of Trust
(Supports Chapter 16)
Purpose: The purpose of this game is to demonstrate that individuals are willing to
trust others.
Materials: The instructor will need:
i.)
A set of Trustor decision sheets found in For the Participant (enough
for half of the class)
ii.)
A set of Trustee decision sheets found in For the Participant (enough
for half of the class)
iii.)
Enough envelopes to have at lease on for each member of the class
(extras may be useful).
Preparation: Mark each envelope with the name of one student. Randomly pair
students’ names and record the pairs. Do not disclose these pairs to any member of
the class. Assign one from each of these pairs to play the role of trustor and the rest
to play the role of trustee.
For the Instructor: Begin by distributing envelopes and decision sheets to each of
the trustors. Read the following instructions: Half of you have been given envelopes
and decision sheets. You will be paired with another member of the class in order to
play a game. You will not know which member of the class you are playing with. If
you have an envelope and a decision sheet, you have been endowed with $10 on
your student account. You may decide to keep this money, or to send it to your
anonymous partner. Whatever amount you send will be tripled before it is given to
your partner. Your partner will then have the opportunity to send any amount of the
money they receive back to you. There is no promise that they will send anything
back. Thus, if I wrote on my decision sheet that I wanted to send $5, I would keep $5
and my partner would receive $15 (three times the $5 I sent). If they decided to
return $7, I would end with $12, and they would end with $8. Alternatively, if they
decided not to return anything, I would end with $5 and they would end with $15.
On the other hand, if I was given an envelope and decided to send my anonymous
partner nothing, they will not receive any money. Are there any questions?
After responding to all questions, ask all trustors to fill in their decision sheets
leaving the bottom portion blank, and place their sheets in the envelope. Collect all
envelopes.
Open each envelope noting the name of the trustor. Fill in the amount received
(multiplied by three) for each trustee on their Trustee decision sheet, and place in
the appropriate envelope. Distribute these envelopes to the trustees. Inform
trustees that they may now decide how much of the money sent to them they would
like to return. Ask them to fill in their decision sheet and place back in their
envelope. Collect these envelopes and use the trustee decision sheets to fill in the
bottom portion of the Trustor decision sheets. Distribute the Trustor decision sheets
to the Trustors to inform them of the outcome of the game. Use the Trustee decision
sheets to update student accounts and to code the data from this exercise.
For the Participant:
Trustor Decision Sheet
Name_____________________________
You have been endowed with $10. You may send any portion of this $10 (or none)
to your anonymous partner. The money you send will be tripled before your partner
receives it. Your partner will be free to choose whether to send any amount of this
money back to you.
I will send $_______________
Your anonymous partner has returned $_______________
Trustee Decision Sheet
Name_____________________________
Your anonymous partner was given $10 and decided to send $____________. This
money has been tripled, so that you now have $_____________. You may return any
portion of this (or none) to your partner.
I will return $_______________
Suggestions for Use in Lecture: It is useful to simply display the average amount
sent by the trustees to demonstrate the level of trust they have. It may also be useful
to display the average portion returned conditioned on how much was sent (for
example using a histogram).