Behaviour Economics: Truth-telling

Reporting private information is common in most economics or non-economics activities, for instance, companies use advertisements to attract customers, a self-employed worker report her income to the tax authorities or doctors state a diagnosis.

But there is a question that concerns us: does everyone choose to misreport their private information if this maximises their material payoff?

Fischbacher, U. and Föllmi-Heusi, F. designed an experiment that allows detecting lies where subjects face no threat of being revealed individually. Instead, they can draw inferences on the population’s overall behaviour. At the end of the experiment, they found out that people tend to disguise their lies, and they believe it works. Subjects are informed that they must roll a dice, which will determine a payoff, the payoff equalling 1, 2, 3, 4, and 5 for the corresponding dice figure and zero if the figure is 6. Since the experimenter cannot see what number was rolled, the subjects can report whatever number they want. Nevertheless, the distribution of the reported numbers reveals information about patterns of lying behaviour within the population.

At the end of experiment, there are a few interesting observations. First, number below 4 is significantly lower than the expected true value of ⅙, while the numbers 4 and 5 are significantly higher than ⅙ (i.e. income maximising subjects). Secondly, 6.7% of subjects reported 0 which shows there are some honest people (i.e. honest subjects). Thirdly, not all lying subjects lie maximally as significantly more than ⅙ subjects reported a 4 (i.e. incomplete cheating).

Why people lie incompletely seems rather interesting to me. Imagine you rolled a 3, what would you report? You would like to maximise your income by reporting a 5 but you do not want others to suspect you for being a greedy liar. In the end, it is highly possible for you to report a 4 to ensure a higher income by disguising your lie.

Thus, we can conclude that:

Utility of lying = Income from lying – Psychological cost of lying.

And this explains the above-mentioned phenomena.

In short, subjects who reported a 1 can only be people whose actual result is 1 or 0. Their high lying aversion resulted in a high psychological cost of lying. Otherwise, they would have reported a higher number to gain a higher income. Subjects who reported a 2 can only be people whose actual result is 0, 1 or 2 and so on.

Many real-life situations are characterised by informational asymmetries between interacting parties. Obviously, such situations may provide an incentive for either party to exploit the informational asymmetries to one’s own advantage. Therefore, we should always question validity of things like advertisement or even news reports when there is presence of informational asymmetry, as income of not telling truth cause lies become ubiquitous from past till today.

References

  1. Fischbacher, U., & Föllmi-Heusi, F. (2013). Lies in disguise—an experimental study on cheating. Journal of the European Economic Association, 11(3), 525-547.
  2. Abeler, J., Nosenzo, D., & Raymond, C. Preferences for truth-telling. Econometrica, forthcoming.
  3. Sutter, Matthias.Deception through telling the truth: Experimental evidence from individuals and teams.Institute of Public Finance, University of Innsbruck

Hu Han Ling (18-O5)

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