Intervention (Hidden)
In our earlier experiment on the pyramid scheme, AEARCTR-0003057, we found that subjects who expect more investors are significantly more likely to invest. This relationship suggests that subjects mistakenly expect to earn more money if more subjects invest. In the pyramid scheme, if everyone invests, half of the subjects lose all their money, and at most a quarter can have positive investment returns. We conjecture that, subjects mistakenly expect higher earnings with a larger percentage of investors, and this is due to the complexity of the decision. To test the complexity mechanism, we introduce two treatments that reduce complexity.
First, we will run a baseline treatment with 20 subjects as in our initial baseline. We will use 7 investors in the baseline for later treatments. Two complexity treatments test whether subjects' bias arises because of the group size (payoffs in large groups are hard to intuit than in small groups), or because of the lack of realisation that most subjects do nor earn money in the experiment.
In the first complexity treatment, there are two investment decisions, and one of those will be randomly chosen for payment. in the first part, using the strategy method, we will ask subjects their investment decision in a tree with 7 other investors where we will vary their position in the tree from 1 to 8. One of these decisions will be radomly implemented for part 1. In the second part, we will run the standard investment decision with 200 subjects. of the that tests whether subjects understand the payoffs if everyone invests in a small group of subjects. to get enough subjects to use in the matching procude of the complexity treatment.
In the second complexity treatment, after the instructions, we will show the subjects a tree in which 200 people invest. Subjects would then answer questions regarding what they earn if they are in the bottom branch of the tree, second bottom, and the third bottom. These branches will be highlighted to make subjects realise how many other investors are in the same position. After they answer these questions correctly as well as our standard comprehension questions, they will proceed to the main experiment in which 200 subjects decide.
In both treatments, after the investment decision, they will estimate the number of investors, will state what they think the experiment is about, and then there will be a dictator decision, and two lotteries. We will randomly choose one of these lotteries, and pay for one randomly chosen decision. The first lottery is a Holt Laury lottery that we have used in the earlier set of experiments. The second lottery is the equivalent to the lottery induced by the investment decisions with 20, 40, 60,...,200 people investing plus their estimated number of investors investing. To generate each lottery, we generated 10000 draws of trees, calculated the payoffs of subjects, and then determined the probability of each payoff outcome. Since the outcome space is very large, we reduced it to probabilities associated with earnings 0, 2, 4, 6, 8, 10, 12, 16, 20, 24, 28 $ versus a sure amount of $4. This reduction is done for each possible amount,probability pair in such a way that the nearest possible amounts have added probabilities and the expected payoffs are the same.
Subjects then solve the race game five times in order to check their klevel reasoning. In the final questionnaire, we ask two financial literacy questions that are standard in surveys (OECD, 2018). We also ask them their gender, income, education level, number of years of education, whether they buy lotteries, whether they buy warranties, and whether they trust others.