Primary Outcomes (explanation)
A brief literature review on the topic of ECU effects in experiments can be found in Voslinsky & Azar (2021).
The first mention of the ECU methodology issue appears in (Davis & Holt, 1993). They present their point of view of the different advantages and drawbacks of using ECU without testing them as follow:
- Expected advantages
• Finer grid that matches better continuous models
• Possibility to vary conversion rates amongst participants
• Intercountry comparability
• Money illusion
- Expected drawbacks
• “Game-board effect”: artificial sense of speculative competitiveness
Because this last drawback, Davis and Holt advise to use experimental currencies only in cases where there are deemed necessary.
There has been only one study that experimentally compares the use ECU and actual currencies in the lab, and they strictly focus on second-price auctions (Drichoutis et al., 2015). No effect has been found in this particular article
2) Theoretical environment and predictions
Our research focuses on participants’ attitude towards risk when confronted to real money or ECU frames. We aim at investigating this phenomenon more in depth in the context of ECUs and aggregating the following existing theories:
- The tangibility effect: the fact that using actual cash versus displaying amounts on computers or forms in the lab changes participants’ behaviour. This effect is first showed by Reinstein & Riener (2012), who found that participants are less generous when using cash than when paid via a computer. In our context, using ECUs brings more distance between the participant and its payoff, causing lower risk aversion.
- The numerosity effect: the fact that face value induces a confusion regarding the perceived actual value of a good. Numerosity perception is the elementary numerical ability in both humans and animals, representing nonverbal information of quantity without counting (Dehaene & Changeux, 1993; Feigenson, Dehaene & Spelke, 2004). This phenomenon has been identified in economics (Fehr & Tyran, 2007; Shafir et al., 1997; Shrivastava et al., 2017) and psychology (Bagchi & Davis, 2016), then extended to consumer behaviour research (Wertenbroch et al., 2007). In the case of ECUs, this theory implies that if participants play with high quantity of ECUs, their perception of actual value may be biased, causing more confusion and thus more variability in the data.
- On high ECU frames, we also follow the findings of Fehr-Duda et al. (2010) where relative risk aversion is not constant but increases with stake size. We thus expect risk aversion to increase with exchange rate.
- The “game-board” effect: proposed by Davis and Holt (1993), they argue that tokens may be less considered by participants than actual money, especially at very high amounts, and thus taken less seriously. Participants’ value perception is thus to be biased downwards, causing decreasing risk aversion and higher variance.
We expect these effects to be true at different stages of the experiments. If using pennies instead of ECUs, the tangibility would prevail and participants would get higher utility from actual money than ECUs, thus taking more serious decisions with actual money rather than ECUs. With ECUs, at intermediate exchange rate, non-constant relative risk aversion is expected to be stronger, as “face value” of the ECUs would bias participants’ perception upwards, bringing them to obtain more utility from tokens at constant actual value. Finally, at very high exchange rates, we expect Davis and Holt (1993) “game-board” theory to be stronger, subjects would then give less value to ECUs, considering them as petty money.
We assume that if participants receiving more utility from a form of currency would pay more attention to the games, play more seriously and thus achieve results closer to the economic optimum. This would also be measured by comparing variances between treatments.
3) Project academic and societal contribution
Academically, the project aims to compensate the current lack of knowledge concerning the use of experimental currency units and how these are perceived by the participants. Such an addition to the literature may provide more tools and better understanding to the experimentalists who use ECUs.
The societal contributions of this work could be first to isolate bias in risk decision-making when individuals take risky decisions with big numbers. We have identified that this contribution can be helpful in the fields of foreign exchange trading and gambling addiction prevention (Palmer et al., 2022).
A better understanding of numerosity could also change the choice architecture in currency trading.
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