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Think twice before running! Bank runs and cognitive abilities

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  • Kiss, H.J.
  • Rodriguez-Lara, I.
  • Rosa-García, A.

Abstract

We assess the effect of cognitive abilities on withdrawal decisions in a bank-run game. In our setup, depositors choose sequentially between withdrawing or keeping their funds deposited in a common bank. Depositors may observe previous decisions depending on the information structure. Theoretically, the last depositor in the sequence of decisions has a dominant strategy and should always keep the funds deposited, regardless of what she observes (if anything). Recognizing the dominant strategy, however, is not always straightforward. If there exists strategic uncertainty (e.g., if the last depositor has no information regarding the decisions of predecessors), then the identification of the dominant strategy is more difficult than in a situation with no strategic uncertainty (e.g., the last depositor is informed about all previous decisions). We find that cognitive abilities, as measured by the Cognitive Reflection Test (CRT), predict withdrawals in the presence of strategic uncertainty (participants with stronger abilities tend to identify the dominant strategy more easily) but that the CRT does not predict behavior when strategic uncertainty is absent.

Suggested Citation

  • Kiss, H.J. & Rodriguez-Lara, I. & Rosa-García, A., 2016. "Think twice before running! Bank runs and cognitive abilities," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 64(C), pages 12-19.
  • Handle: RePEc:eee:soceco:v:64:y:2016:i:c:p:12-19
    DOI: 10.1016/j.socec.2015.01.006
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    Cited by:

    1. Duffy, Sean & Naddeo, JJ & Owens, David & Smith, John, 2016. "Cognitive load and mixed strategies: On brains and minimax," MPRA Paper 89720, University Library of Munich, Germany.
    2. Pablo Brañas-Garza & Praveen Kujal & Balint Lenkei, 2015. "Cognitive Reflection Test: Whom, how, when," Working Papers 15-25, Chapman University, Economic Science Institute.
    3. Cueva, Carlos & Iturbe-Ormaetxe, Iñigo & Mata-Pérez, Esther & Ponti, Giovanni & Sartarelli, Marcello & Yu, Haihan & Zhukova, Vita, 2016. "Cognitive (ir)reflection: New experimental evidence," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 64(C), pages 81-93.
    4. Alós-Ferrer, Carlos & Hügelschäfer, Sabine, 2016. "Faith in intuition and cognitive reflection," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 64(C), pages 61-70.
    5. Juan M. Benito-Ostolaza & Penélope Hernández & Juan A. Sanchis-Llopis, 2015. "Are individuals with higher cognitive ability expected to play more strategically?," Working Papers 1507, Department of Applied Economics II, Universidad de Valencia.
    6. Hubert Janos Kiss & Ismael Rodriguez-Lara & Alfonso Rosa-Garcia, 2018. "Who runs first to the bank?," IEHAS Discussion Papers 1826, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
    7. repec:eee:eecrev:v:104:y:2018:i:c:p:167-184 is not listed on IDEAS
    8. Allred, Sarah & Duffy, Sean & Smith, John, 2016. "Cognitive load and strategic sophistication," Journal of Economic Behavior & Organization, Elsevier, vol. 125(C), pages 162-178.
    9. repec:eee:jeborg:v:142:y:2017:i:c:p:79-91 is not listed on IDEAS
    10. repec:ers:journl:v:xxi:y:2018:i:special2:p:144-157 is not listed on IDEAS
    11. Hubert Janos Kiss & Ismael Rodriguez-Lara & Alfonso Rosa-Garcia, 2018. "Does response time predict withdrawal decisions? Lessons from a bank-run experiment," IEHAS Discussion Papers 1809, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
    12. Maria Semenova, 2018. "A Bank Run in a Classroom: Do Smart Depositors Withdraw on Time?," HSE Working papers WP BRP 64/FE/2018, National Research University Higher School of Economics.
    13. Brañas-Garza, Pablo & Smith, John, 2016. "Cognitive abilities and economic behavior," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 64(C), pages 1-4.

    More about this item

    Keywords

    Bank runs; Coordination game; Observability of actions; Cognitive abilities; Strategic uncertainty;

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • J16 - Labor and Demographic Economics - - Demographic Economics - - - Economics of Gender; Non-labor Discrimination

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