Will Investors Glean and Gamble?

Posted: 22 Mar 2013

See all articles by Roman M. Sheremeta

Roman M. Sheremeta

Case Western Reserve University

Timothy W. Shields

Chapman University - The George L. Argyros College of Business and Economics; Chapman University - Economic Science Institute

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

Suggested Citation

Sheremeta, Roman M. and Shields, Timothy W., Will Investors Glean and Gamble? (March 10, 2013). Available at SSRN: https://ssrn.com/abstract=2236463 or http://dx.doi.org/10.2139/ssrn.2236463

Roman M. Sheremeta

Case Western Reserve University ( email )

10900 Euclid Ave.
Cleveland, OH 44106
United States

Timothy W. Shields (Contact Author)

Chapman University - The George L. Argyros College of Business and Economics ( email )

1 University Drive
Orange, CA 92866
United States

Chapman University - Economic Science Institute ( email )

1 University Drive
Orange, CA 92866
United States

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