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Recording the History of Economic Exchange Alters That History

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Title: Recording the History of Economic Exchange Alters That History


1
Recording the History of Economic Exchange Alters
That History
  • Presentation by John Dickhaut
  • Purdue University
  • October 26, 2006

2
Overview
  • What do we seek to explain?
  • Why are we conducting an experiment?
  • Whats the experiment about?
  • What does the evidence suggest?
  • Where are we headed with this research agenda?

3
What do we seek to explain?
  • Our focus is on the creation of a record of
    exchange outside the human brain.
  • i.e., Biology, anthropology economics of the
    journal entry.
  • Studying recordkeeping requires us to go in two
    directions
  • Back to the brain to study antecedent conditions.
  • Forward into relatively primitive economies to
    study the consequences of recordkeeping.
  • Why is this research important?
  • We want to explain the genesis of accounting,
    which is the creation of a record of exchange
    external to the brain.

4
The Evolutionary Function of Memory
  • The ability to remember past interactions with
    ones environment and other strategic actors
    within that environment is crucial to survival.
  • Present in simple organisms e.g., the e coli
    bacterium.
  • Memory sustains cooperation organisms have to
    recognize other individuals and keep score.
    (Ridley 1996, 83)
  • Game theorists note strategies like tit-for-tat
    work fairly well but require some ability to
    recall past moves.
  • Evolutionary psychologists conclude that memory
    is an adaptation that primes humans for exchange
    and social interaction.

5
Accounting as Memory External to the BrainBasu
Waymire (2006) Story
  • Records created outside the brain as exchange
    complexity increases. The origins of accounting
    derive from memory constraints within the human
    brain.
  • Recordkeeping, law other exchange supporting
    institutions evolve to replace unaided human
    memory and informal sanctions for non-cooperative
    behavior present in small groups.
  • Larger networked groups enabled by recordkeeping
    other institutions enable complex exchange that
    promotes division of labor that improves economic
    welfare (Adam Smith).
  • Groups that evolve markets with effective
    supporting institutions organizations will, all
    else equal, more likely flourish (Douglass
    North).

6
Basu Waymire (2006) Predictions
  • Formal recordkeeping will emerge as a mnemonic
    aid as the complexity of exchange increases.
    Recordkeeping sophistication will be a function
    of
  • exchange complexity scale,
  • the extent to which a given culture relies on
    markets and a specialized division of labor
  • Evolved recordkeeping will feed back and promote
  • more complex and advantageous exchange
  • the co-evolution of exchange-supporting
    institutions including language, standardized
    weights measures and law that punishes
    non-cooperators

7
Three Ways to Investigate Predictions
  • Archaeology Examine the characteristics of
    ancient civilizations their recordkeeping
    practices
  • Anthropology Examine ethnographic data drawn
    from a spectrum of cultures
  • Experimental economics Examine use of
    recordkeeping and its consequences in a lab
    setting

8
Archaeological EvidenceBroadly Consistent with
B-W Story
Sumerian marked envelope with matching tokens
(3300 BC)
9
Archaeological EvidenceLimitations - In
Ascending Order
  • Very difficult expensive to do
  • Small samples involving more intensive research
    of specific cases
  • Data are hard to time - i.e., dating artifacts to
    within 100 years makes it hard to draw causal
    inferences.

10
Ethnographic SamplesData Sources
  • Human Relations Area Files (HRAF) at Yale (some
    available online).
  • Cumbersome hard to work with.
  • Galtons Problem. Data lack independence.
  • Standard Cross-Cultural Sample (SCCS)
  • Designed to maximize data independence.
  • Extensive data coded for 186 societies for over
    1,000 variables.

11
Examining Ethnographic SamplesSCCS
Recordkeeping Variable 149
  • 1 None (Nama Hottentot 1,860 A.D.) n 73
  • 2 Mnemonic Devices (Kung Bushmen 1,950 A.D.) n
    49
  • 3 Nonwritten records (Incans 1,500 A.D.) n 21
  • 4 True writing, no records (Somali 1,900 A.D.)
    n 12
  • 5 True writing, with records (Babylon 1,700
    B.C.) n 31

12
Tests of AssociationCorrelations of
Recordkeeping with Measures of Economic
Complexity (SCCS)
13
Ethnographic EvidenceStrengths Weaknesses
  • Strengths
  • Quantification allows for statistical analysis
  • Large samples allow generalizability
  • Weaknesses
  • Still cant establish causality

14
Why an Experiment?
  • CAUSALITY
  • Seek to re-create Baseline Mesopotamia
  • That is, we use a simple experiment to
    investigate whether the hypothesized economic
    forces
  • Give rise to recordkeeping (Antecedents)
  • Lead to fundamental changes in the nature of
    economic exchange itself. (Consequences)

15
Experimental Set-UpTrust Game
16
Experimental Set-Up (contd.)
  • Trust Game with two manipulations
  • Exchange Complexity
  • Simple One-on-one play for 10 periods
  • Complex Each subject plays game simultaneously
    with five others (5 on 5) for 10 periods
  • Recordkeeping Availability
  • Yes (Computer screen available where doodling is
    possible)
  • No (Computer screen not available)

17
Exchange Complexity
  • Basic

Complex
Investors Trustees A1 B1 A2 B2 A3 B3 A
4 B4 A5 B5
Investors Trustees A1 B1 B2 B3 B4
B5
18
Exchange Complexity (cont.)
  • Basic

Complex
Investors Trustees A1 B1 A2 B2 A3 B3 A
4 B4 A5 B5
Investors Trustees B1 A2 B2 B3 B4
B5
19
Exchange Complexity (cont.)
Basic
Complex
Investors Trustees A1 B1 A2 B2 A3 B3 A
4 B4 A5 B5
Investors Trustees A1 B1 A2 B2 A3 B3 A
4 B4 A5 B5
20
Four Primary Results
  • Endogenous recordkeeping in complex exchange.
  • Recordkeeping increases gains from exchange in
    complex setting.
  • Recordkeeping promotes trust fairness in
    economic exchange.
  • Recordkeeping alters fundamentally the evolution
    of economic exchange.

21
Finding 1 Recordkeeping Endogenous to Complex
Exchange
22
Finding 2 Recordkeeping Produces Higher Gains
from Complex Exchange
23
Finding 3 Recordkeeping Promotes Commitment
Reciprocity in Exchange
24
Finding 3 (contd.) Recordkeeping Promotes Trust
Reciprocity in Exchange
25
Finding 3 (contd.) Recordkeeping Promotes Trust
Reciprocity in Exchange
26
Finding 4 Recordkeeping Alters Fundamentally the
Evolution of Exchange(Within Dyad Correlations)
27
Finding 4 (contd.) Recordkeeping Alters
Fundamentally the Evolution of Exchange
(Correlations with Average ROI from Other
Trustees)
28
Finding 4 (contd.) Recordkeeping Alters
Fundamentally the Evolution of Exchange
(Correlations with Average ROI Received by Other
Investors)
29
ConclusionsWhat Have We Learned Here?
  • Direct causal support for the hypothesis that
    accountings recordkeeping function emerges from
    complex exchange and enables beneficial exchange.
  • Powerful reminder that seemingly simple
    frequently overlooked institutions exert
    powerful effects on the organization of human
    society.
  • Mind those debits credits!

30
Experiments on the fundamental nature of
accounting institutions and conventions
  • Contributors
  • John Dickhaut, Greg Waymire, Sudipta Basu, Kristy
    Towry, Ivo Tavlov, Radhika Lunawat, Baohua Xin

31
Why these types of experiments
  • Feynman-Critical role of experiments in physics.
  • Emerging role of experiments in economics.
  • Experiments in physics and economics are part of
    teaching.
  • Maybe experiments could be used to do more in
    accounting.

32
An appropriate experimental platform
  • A Platform should have some characteristics of
    physics experiments
  • ExampleTwo Slit Experiments of Quantum
    Mechanics.
  • Easy to add on to the structure of the experiment
    to get deeper results.
  • A platform to study the fundamentals of
    accounting should operationalize the notion of
    investing capital and getting a return on
    capital.
  • Without other accessories such as a legal system.

33
A platform - The Investment Game
34
The Universal Adoption of Income Reporting(Very
Early)
  • John Dickhaut, Radhika Lunawat, Greg Waymire and
    Baohua Xin

35
Abstract
Why do firms report income numbers? Virtually
all established companies and known small
enterprises report income numbers. We consider
this question using four person economies with
two investors and two trustees each. Trustees
can precommit to reporting income before capital
is invested. Investors can then use the
precommit information as a proxy for trust. The
experimental design asks if competition for
reputation for being trustworthy among trustees
will lead them to tend to universally report
income.
36
What is the issue?
  • Why do firms report income numbers?
  • Accounting a discipline that has worried about
    its existence for the last 40 years.
  • Most serious researchers I know ask why does
    accounting exist.
  • Actually never built a structure of why income
    exists.
  • 1000s of studies interested in the properties of
    income, dividends their relationship and how do
    markets function.
  • In particular historical records of when firms
    switched form reporting income to reporting
    dividends.

37
What is augmented structure?
38
Design of the experiment
  • Adjust trust game so that the multiplier is
    risky.
  • Setting has five or two person dyads per economy.
  • Allow cheap talk.
  • ManipulationGive trustees the ability to
    precommit to having ?x, the amount of income
    revealed at the end of period after dividends
    revealed.

A1 B1 A2 B2 A3 B3 A4 B4 A5 B5
39
Intuition
  • Production Income.
  • Investors will want to know which trustees are
    skimming off the top and which are not.
  • A trustee not wanting to be perceived as
    potential skimmer will choose to precommit to
    reporting income.
  • Because no trustee will want to be left behind
    eventually all trustees will commit to reporting
    income.
  • An aside on precommitment

40
Design and Methods
  • Z tree
  • Put on top of Z tree a mechanism for cheap talk.
  • You could only talk with someone you were paired
    with.
  • Put in option for trustee of having production
    information revealed.

41
Picture of design and data to date
Precommitment Possible
No Precommitment Possible
Risky
-One 10 person economy -Four 2 person economies
No data at all
Ambiguous
No data at all
No data at all
42
Results (Data planned to be collected)
  • No of precommitters through time.
  • Efficiencies (with and without precommittment to
    report income)
  • Investment conditional on precommittment vs.
    Investment conditional on no precommittment
  • Return conditional on precommittment and return
    conditional on no precommittment.

43
Results for 5 X 5 Configuration
44
Results for 2 X 2 Configurations
45
Thought experiment on verifiable information
  • VerifiableHard Information.
  • Hard Information Signed receipt.
  • Allow cheap talk.
  • Give people the ability to write on each others
    computer screens and send captured screens to
    each other.

46
Thought experiment on matching
  • Complex setting.
  • With recordkeeping.
  • Different types of production rates for different
    pairings.

47
Thought experiment on creating accountancy
  • Basic trust game complex setting repeated.
  • Allow side payments.
  • All information available to everyone. See if
    someone is willing to differentially pay best
    record keeper.

48
The value of thought experiments for accounting
  • Allows discussion across different accounting
    domains
  • Analytical, empirical and experimental.
  • Helps avoid possible wastage of resources on poor
    experiments.
  • Allows discussion with non-accounting disciplines.


49
Do you have some ideas for thought experiments?
  • Some potential candidates for thought
    experiments.
  • The emergence of accounting conservatism.
  • The emergence of an enforcement mechanism.
  • The emergence of auditing.
  • What is the fundamental source of where the
    accounting institutions and conventions came
    initially and why will we see these institutions
    emerge in our experiments?
  • THE BRAIN IS THE ORIGINAL ACCOUNTING INSTITUTION
    AND INFLUENCES INDIRECTLY OUR INSTITUTIONAL
    ACCOUNTING CHOICES.
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