Angelina Christie and Daniel Houser
The purpose of this paper is to test whether underpricing can serve as a signal of quality in a financing-investment environment and to compare it under the two institutions for…
Abstract
Purpose
The purpose of this paper is to test whether underpricing can serve as a signal of quality in a financing-investment environment and to compare it under the two institutions for financing offers that are commonly observed in corporate financial markets: take-it-or-leave-it offer (TLO) and the competitive bidding offer (CBO).
Design/methodology/approach
The research paper uses experimental economics methodology and laboratory experiments to investigate the research question.
Findings
The results suggest that underpricing can serve as a signal of quality but not sustainable as a repeat strategy. Over time, the high-quality firms converge to a pooling strategy rather than bearing the cost of signaling. Additionally, underpricing is lower under CBO than under TLO institution due to competitive bidding. Signaling under CBO institution may be less salient due to possible mimicking by the low-quality firms.
Originality/value
This paper presents a first experimental investigation of the underpricing-signaling hypothesis in a financing-investment environment under asymmetric information. The choice of institution in a financing environment produces qualitatively and strategically different behavior among firms and investors.
Details
Keywords
Daniel Houser and Kevin McCabe
Neuroeconomics is the study of how the brain makes economic decisions. By its nature neuroeconomics studies the mechanisms of decision-making, assumed to be computational, in…
Abstract
Neuroeconomics is the study of how the brain makes economic decisions. By its nature neuroeconomics studies the mechanisms of decision-making, assumed to be computational, in order to better understand the strategies people use and the choices that people make. The focus of this book is how neuroeconomics connects to health economics in a way that improves our understanding of health care and treatment decisions. This is natural for several reasons. First, the brain and the body are intimately connected to each other and the health of one depends on the other. Second, the health system is inherently about decisions. Decisions to stay healthy, decisions to diagnose illness, decisions to treat, decisions to invest in new treatments, decisions to insure, and decisions to pay. Finally, these decisions can be difficult, as the media's consistent attention to this area attests. In light of this, for this volume we chose to include chapters that review basic research on emotion or social preference that have direct relevance to decisions in health economics. We have also included chapters that refer more specifically to some aspect of people's health care or treatment decisions. In the following we indicate the chapters within each topic area. Although many chapters could arguably fit in multiple categories, we have listed each chapter only once and without particular order.
Purpose – This chapter discusses the role of emotion expression in decision-making. To understand connections between emotion and decision it is helpful first to differentiate…
Abstract
Purpose – This chapter discusses the role of emotion expression in decision-making. To understand connections between emotion and decision it is helpful first to differentiate between emotion experience and emotion expression. Understanding how emotion expression influences decision-making is important as a practical matter. However, in contrast to emotion experience, economic research has paid little attention to the significance of emotion expression in decision-making.
Approach – I review recent studies on emotion expression, paying specific attention to possible connections between emotion expression, punishment, fair economic exchange, and well-being.
Practical implications – In contrast to emotions, which are typically difficult to control, I suggest that opportunities for emotion expression can feasibly be manipulated through appropriately designed policies. I further suggest that this approach may have the ability to positively affect well-being and economic outcomes.
Value of the chapter – The chapter provides new perspectives on how policy-makers can benefit by understanding the effect of emotion expression in decision-making. The chapter also suggests future research to improve our understanding of emotion expression.
Andrei C. Miu, Mircea Miclea and Daniel Houser
Purpose – This chapter focuses on individual differences in anxiety, by reviewing its neurobiology, cognitive effects, with an emphasis on decision-making, and recent developments…
Abstract
Purpose – This chapter focuses on individual differences in anxiety, by reviewing its neurobiology, cognitive effects, with an emphasis on decision-making, and recent developments in neuroeconomics.
Methodology – A review and discussion of anxiety and decision-making research.
Practical implications – This chapter argues that by making the step from emotional states to individual differences in emotion, neuroeconomics can extend its neurobiological roots and outreach its current clinical relevance.
Value of chapter – This chapter contributes to the literature on individual differences in emotion and their effects on decision-making, which is increasingly important in mainstream behavioral economics and neuroeconomics.
Purpose – A placebo effect is a (positive) change in health outcomes that is due to a (positive) change in beliefs about the value of a treatment. Placebo effects might be…
Abstract
Purpose – A placebo effect is a (positive) change in health outcomes that is due to a (positive) change in beliefs about the value of a treatment. Placebo effects might be “behavioral,” in the sense that revised beliefs lead to behavioral changes or new actions that in turn yield changes in health outcomes. Placebo effects might also include a “physiological” component, which refers broadly to non-behavioral, brain-modulated mechanisms by which new beliefs cause changes in health outcomes. Nearly all formal economic models of human behavior are consistent with behavioral placebo effects, but strongly inconsistent with their physiological counterparts. The reason is that the latter effects can imply that expectations enter, rather than multiply, state-contingent preferences. It is therefore unfortunate that little evidence exists on physiological placebo effects. We report data from novel clinical experiments with caffeine that seek to provide such evidence.
Methods – Subjects visit the clinic on multiple occasions. On each visit they ingest either a placebo or caffeine pill. Subjects only know the probability with which the pill includes caffeine. We obtain physiological measurements prior to ingestion and at 30, 60, and 90min after ingestion. Importantly, we constrain subjects to remain seated and read pre-selected magazines during the interval between treatment and outcome measurement.
Findings – Our design provides particularly clean inference because it (i) eliminates the possibility of behavioral confounds; (ii) provides for measurements at the individual level; (iii) manipulates beliefs without deception; and (iv) uses salient rewards. We find evidence for the existence of physiological placebo effects mediated by expectations.
Implications – Our results are consistent with the possibility that the prefrontal cortex provides external, top-down control that modulates physiological outcomes, and make a case for the importance of research geared toward developing appropriate and tractable frameworks that accommodate non-linear relationships between expectations and preferences.