Will Investors Glean and Gamble?
Posted: 22 Mar 2013
Date Written: March 10, 2013
Abstract
We designed an experiment to study behavior in information transmission games where underwriters have economic incentives to deceive and investors have incentives to avoid deception. Theory predicts that investors should not be able to glean information from the underwriters’ reports, and thus investment decisions should be based solely on the investment’s fundamental risk. To test this prediction we elicited choices from risky gambles constructed to be mathematically equivalent to the information setting if the underwriters’ reports had no information content. Participants acted simultaneously as underwriters and investors in one-shot information transmission games. Our findings indicate that underwriters acted deceptively, while investors invested conditional on the underwriters’ reports. Moreover, investors invested significantly more often when the expected return from the investment was relatively high. We observed that investors both gleaned and gambled, and those who gleaned earned higher payoffs.
Keywords: experiment, strategic communication, risk, deception, investment advice
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