Three Essays in Experimental Economics

The experiments presented and analyzed in this dissertation concern two well-established phenomena in behavioral economics: that human decision makers hold biased beliefs about probability and that free-form communication between economic agents promotes cooperation far in excess of what standard theory predicts. First, Chapter 2 studies subjective probability, focusing on the well-established existence of both the Hot Hand and Gambler's Fallacies — the false expectation of positive and negative autocorrelation, respectively. Both biases are prevalent throughout a wide variety of real-world contexts; what causes a person to favor one over the other? We conduct an experiment in which we observe fully informed subjects switching between the Hot Hand and Gambler's Fallacies when predicting future outcomes of mathematically identical sequences. Subjects exhibit the Gambler's Fallacy when predicting single outcomes but favor the Hot Hand when asked explicitly to estimate probabilities. Connecting our results to existing theory suggests that very subtle changes in framing lead decision makers to employ substantially different approaches to form predictions. The remainder of this dissertation studies cheap talk communication between human subjects playing incentivised trust games. In Chapter 3, we study free-form communication using a dataset of over 1000 messages sent between participants in a laboratory Trust game. We employ Natural Language Processing to systematically generate meaningful partitions of the messages space which we can then examine with established regression approaches. Our investigation reveals features correlated with trust that have not previously been considered. Most notably, highly detailed, specific promises establish trust more effectively than other messages which signal the same intended action. Additionally, we observe that the most and least trusted messages in our dataset differ starkly in their quality. Highly trusted messages are longer, more detailed, and contain fewer grammatical errors whereas the least trusted messages tend to be brief and prone to errors. In Chapter 4, we examine whether the difference is message quality affects trust by acting as a signal of effort. We report the results of an experiment designed to test whether promises which require higher levels of effort result in greater trust from their recipients. We find that more costly promises lead recipients to trust more frequently. However, there is no corresponding, significant difference in the trustworthiness of their senders. Further, when asked their beliefs explicitly, recipients do not believe that higher cost promises are more likely to be trustworthy. This presents a potential challenge to our understanding of trust between economic decision makers. If effort increases trust without altering receivers' beliefs, receivers must be concerned with factors other than their own payoff maximization. We conclude by presenting a follow-up experiment where varying effort cost cannot convey the sender's intentions, however, the results are inconclusive.