Can the neuroeconomics revolution revolutionize psychiatry?

Neuroeconomics is a rapidly growing new research discipline aimed at describing the neural substrate of decision-making using incentivized decisions introduced in experimental economics. The novel combination of economic decision theory and neuroscience has the potential to better examine the interactions of social, psychological and neural factors with regard to motivational forces that may underlie psychiatric problems. Game theory will provide psychiatry with computationally principled measures of cognitive dysfunction. Given the relatively high heritability of these measures, they may contribute to improving phenotypic definitions of psychiatric conditions. The game-theoretical concepts of optimal behavior will allow description of psychopathology as deviation from optimal functioning. Neuroeconomists have successfully used normative or near-normative models to interpret the function of neurotransmitters; these models have the potential to significantly improve neurotransmitter theories of psychiatric disorders. This paper will review recent evidence from neuroeconomics and psychiatry in support of applying economic concepts such as risk/uncertainty preference, time preference and social preference to psychiatric research to improve diagnostic classification, prevention and therapy.

Persistent Deadlock in Multilateral Trade Negotiations: The Case of Doha

The history of the General Agreement on Tariffs and Trade negotiations is full of anecdotes on missed deadlines, failed ministerial conferences, and brinkmanship situations. Tactics such as walking away from the table or sleep-depriving night sessions are legendary in the context of attempting to overcome impasse in negotiations. This article traces and explains the recurrent deadlock in the Doha Round negotiations. It identifies four structural/contextual factors – ideas, institutions, interests, and information – as necessary for understanding and anticipating potential deadlocks. The article also offers a definition of deadlock, and discusses a set of factors highlighted in the international relations literature that explain the existence and persistence of deadlock. With the help of game theory, it then illustrates the challenges faced by actors during trade negotiations. The article concludes by outlining two general scenarios for the Doha Development Agenda and discusses their implications for the World Trade Organization.

Bargaining for power and information : an experimental and theoretical analysis of the interaction between institutions, externalities and adverse selection

Bargaining is the building block of many economic interactions, ranging from bilateral to multilateral encounters and from situations in which the actors are individuals to negotiations between firms or countries. In all these settings, economists have been intrigued for a long time by the fact that some projects, trades or agreements are not realized even though they are mutually beneficial. On the one hand, this has been explained by incomplete information. A firm may not be willing to offer a wage that is acceptable to a qualified worker, because it knows that there are also unqualified workers and cannot distinguish between the two types. This phenomenon is known as adverse selection. On the other hand, it has been argued that even with complete information, the presence of externalities may impede efficient outcomes. To see this, consider the example of climate change. If a subset of countries agrees to curb emissions, non-participant regions benefit from the signatories’ efforts without incurring costs. These free riding opportunities give rise to incentives to strategically improve ones bargaining power that work against the formation of a global agreement. This thesis is concerned with extending our understanding of both factors, adverse selection and externalities. The findings are based on empirical evidence from original laboratory experiments as well as game theoretic modeling. On a very general note, it is demonstrated that the institutions through which agents interact matter to a large extent. Insights are provided about which institutions we should expect to perform better than others, at least in terms of aggregate welfare. Chapters 1 and 2 focus on the problem of adverse selection. Effective operation of markets and other institutions often depends on good information transmission properties. In terms of the example introduced above, a firm is only willing to offer high wages if it receives enough positive signals about the worker’s quality during the application and wage bargaining process. In Chapter 1, it will be shown that repeated interaction coupled with time costs facilitates information transmission. By making the wage bargaining process costly for the worker, the firm is able to obtain more accurate information about the worker’s type. The cost could be pure time cost from delaying agreement or cost of effort arising from a multi-step interviewing process. In Chapter 2, I abstract from time cost and show that communication can play a similar role. The simple fact that a worker states to be of high quality may be informative. In Chapter 3, the focus is on a different source of inefficiency. Agents strive for bargaining power and thus may be motivated by incentives that are at odds with the socially efficient outcome. I have already mentioned the example of climate change. Other examples are coalitions within committees that are formed to secure voting power to block outcomes or groups that commit to different technological standards although a single standard would be optimal (e.g. the format war between HD and BlueRay). It will be shown that such inefficiencies are directly linked to the presence of externalities and a certain degree of irreversibility in actions. I now discuss the three articles in more detail. In Chapter 1, Olivier Bochet and I study a simple bilateral bargaining institution that eliminates trade failures arising from incomplete information. In this setting, a buyer makes offers to a seller in order to acquire a good. Whenever an offer is rejected by the seller, the buyer may submit a further offer. Bargaining is costly, because both parties suffer a (small) time cost after any rejection. The difficulties arise, because the good can be of low or high quality and the quality of the good is only known to the seller. Indeed, without the possibility to make repeated offers, it is too risky for the buyer to offer prices that allow for trade of high quality goods. When allowing for repeated offers, however, at equilibrium both types of goods trade with probability one. We provide an experimental test of these predictions. Buyers gather information about sellers using specific price offers and rates of trade are high, much as the model’s qualitative predictions. We also observe a persistent over-delay before trade occurs, and this mitigates efficiency substantially. Possible channels for over-delay are identified in the form of two behavioral assumptions missing from the standard model, loss aversion (buyers) and haggling (sellers), which reconcile the data with the theoretical predictions. Chapter 2 also studies adverse selection, but interaction between buyers and sellers now takes place within a market rather than isolated pairs. Remarkably, in a market it suffices to let agents communicate in a very simple manner to mitigate trade failures. The key insight is that better informed agents (sellers) are willing to truthfully reveal their private information, because by doing so they are able to reduce search frictions and attract more buyers. Behavior observed in the experimental sessions closely follows the theoretical predictions. As a consequence, costless and non-binding communication (cheap talk) significantly raises rates of trade and welfare. Previous experiments have documented that cheap talk alleviates inefficiencies due to asymmetric information. These findings are explained by pro-social preferences and lie aversion. I use appropriate control treatments to show that such consideration play only a minor role in our market. Instead, the experiment highlights the ability to organize markets as a new channel through which communication can facilitate trade in the presence of private information. In Chapter 3, I theoretically explore coalition formation via multilateral bargaining under complete information. The environment studied is extremely rich in the sense that the model allows for all kinds of externalities. This is achieved by using so-called partition functions, which pin down a coalitional worth for each possible coalition in each possible coalition structure. It is found that although binding agreements can be written, efficiency is not guaranteed, because the negotiation process is inherently non-cooperative. The prospects of cooperation are shown to crucially depend on i) the degree to which players can renegotiate and gradually build up agreements and ii) the absence of a certain type of externalities that can loosely be described as incentives to free ride. Moreover, the willingness to concede bargaining power is identified as a novel reason for gradualism. Another key contribution of the study is that it identifies a strong connection between the Core, one of the most important concepts in cooperative game theory, and the set of environments for which efficiency is attained even without renegotiation.

School-age children show a bias toward fantasy classifications after playing a platform game

We investigated the influence of playing a video game on children’s ability to distinguish between fantasy and reality. School-age children played a platform game for 15 min and then performed a fantasy/reality distinction task in which they were to judge whether images (from the platform game and from other games) were fantasy images or reality images. Unlike those in the control group (who played a memory game), the children in the experimental group showed a response bias toward mistakenly classifying reality images from the video game as fantasy images (as determined by means of an analysis based on signal detection theory). We conclude that playing the video game exerted a short-term influence on children’s ability to distinguish between fantasy and reality.