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Think Twice Before Running! Bank Runs and Cognitive Abilities

Author

Listed:
  • Hubert János Kiss

    (‘Momentum’ Game Theory Research Group, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences and Eötvös Loránd University - Department of Economics)

  • Ismael Rodriguez-Lara

    (Middlesex University London - Business School and LUISS Guido Carli University, Rome)

  • Alfonso Rosa-García

    (Facultad de Ciencias Juridicas y de la Empresa, Universidad Catolica San Antonio)

Abstract
We assess the impact 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. They 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., the last depositor has no information about predecessors’ decisions) the identification of the dominant strategy requires harder thinking than when there is not 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 higher abilities tend to identify the dominant strategy more easily) but the CRT does not predict behavior when there is no strategic uncertainty.

Suggested Citation

  • Hubert János Kiss & Ismael Rodriguez-Lara & Alfonso Rosa-García, 2014. "Think Twice Before Running! Bank Runs and Cognitive Abilities," CERS-IE WORKING PAPERS 1428, Institute of Economics, Centre for Economic and Regional Studies.
    • Handle: RePEc:has:discpr:1428
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    More about this item

    Keywords

    bank runs; coordination game; observability of actions; cognitive abilities; strate-gic uncertainty;
    All these keywords.

    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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