Alexander Coutts

Assistant Professor of Economics, Nova School of Business and Economics

Working Papers
Optimistic beliefs affect important areas of economic decision making, yet direct knowledge on how belief biases operate remains limited. To better understand these biases I conduct an experiment examining beliefs about binary events with financial stakes. By varying financial prizes in outcomes, as well as incentive payments for accuracy, the experiment is able to distinguish between two leading theories of optimistic belief formation that differ in their assumptions about how such beliefs are constrained. The Optimal Expectations theory of Brunnermeier and Parker (2005) models beliefs as being constrained through the future costs of holding incorrect beliefs, while the Affective Decision Making model of Bracha and Brown (2012) argues that beliefs are constrained by mental costs of distorting reality. The results suggest that people hold optimistically biased beliefs, and comparative statics indicate that these beliefs are not constrained by increasing the costs of making inaccurate judgments. In fact, the results support the theory of Bracha and Brown (2012), as observed bias is increasing in the size of incentive payments for accuracy.
Bayesian updating remains the benchmark for dynamic modeling under uncertainty within economics. Recent theory and evidence suggest individuals may process information asymmetrically when it relates to personal characteristics or future life outcomes, with good news receiving more weight than bad news. I examine information processing across a broad set of contexts: 1) ego relevant, 2) financially relevant, and 3) non value relevant. In the first two cases, information about outcomes is valenced, containing either good or bad news. In the third case, information is value neutral. In contrast to a number of previous studies I do not find differences in belief updating across valenced and value neutral settings. Updating across all contexts is asymmetric and conservative: the former is influenced by sequences of signals received, a new variation of confirmation bias, while the latter is driven by non-updates. Despite this, posteriors are well approximated by those calculated using Bayes' rule. Most importantly these patterns are present across all contexts, cautioning against the interpretation of asymmetric updating or other deviations from Bayes' rule as being motivated by psychological biases.
The use of lab experiments outside of traditional experimental economics laboratories, or "lab in the field" experiments, is rapidly increasing, given the recognition among researchers of their value in studying the preferences and behavior of theoretically relevant populations. While purporting to maintain the paradigm of control that a standard laboratory experiment offers, lab in the field experiments are often conducted in natural settings where researchers inherently must relinquish some of this control. In this paper I present evidence that extemporaneous communication about a public goods game across rural villages in Rwanda led to unanticipated increases in cooperative behavior. To recover causal estimates of the effect of communication, I utilize a matching strategy which matches similar villages on all observables available at planning stages, and compares villages that had opportunities to communicate with past participants, with villages that had no such opportunities. I conclude that exposure to previous participants increases overall cooperativeness by 8-14%. As these results are theoretically unanticipated, they suggest caution regarding the design and interpretation of lab in the field studies.
Work in Progress