Does response time predict withdrawal decisions? Lessons from a bank-run experiment

Purpose - The purpose of this paper is to analyze how response time in a laboratory experiment on bank runs affects withdrawal decisions. Design/methodology/approach - In the authors’ setup, the bank has no fundamental problems, depositors decide sequentially whether to keep the money in the bank or to withdraw, and they may observe previous decisions depending on the information structure. The authors consider two levels of difficulty of decision-making conditional on the presence of strategic dominance and strategic uncertainty. The authors hypothesize that the more difficult the decision, the longer is the response time, and the predictive power of response time depends on difficulty. Findings - The authors find that response time is longer in information sets with strategic uncertainty compared to those without (as expected), but the authors do not find such relationship when considering strategic dominance (contrary to the hypothesis). Response time correlates negatively with optimal decisions in information sets with a dominant strategy (contrary to the expectation) and also when decisions are obvious in the absence of strategic uncertainty (in line with the hypothesis). When there is strategic uncertainty, the authors find suggestive evidence that response time predicts optimal decisions. Research limitations/implications - Being a laboratory experiment, it is questionable if depositors in real life behave similarly (external validity). Practical implications - Since episodes of bank runs are characterized by strategic uncertainty, the result that under strategic uncertainty, longer response time leads to better decisions suggests that suspension of convertibility is a useful tool to curb banking panics. Originality/value - To the best of authors’ knowledge, this is the first study concerning the relationship between response time and the optimality of decisions in a bank-run game.