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Think twice before running! Bank runs and cognitive abilities

Hubert Janos Kiss, Ismael Rodriguez-Lara and Alfonso Rosa-García ()

Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), 2016, vol. 64, issue C, 12-19

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.

Keywords: Bank runs; Coordination game; Observability of actions; Cognitive abilities; Strategic uncertainty (search for similar items in EconPapers)
JEL-codes: C91 D03 D8 G02 J16 (search for similar items in EconPapers)
Date: 2016
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Working Paper: Think Twice Before Running! Bank Runs and Cognitive Abilities (2014) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:soceco:v:64:y:2016:i:c:p:12-19

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