Address

School of Business Management

East China Normal University

Shanghai, China 200062

Contact

Follow

©2019 by Luyao Zhang                                                                                          Wherever I go, no matter what the weather is, I always bring my own Sunshine.

子曰:德不孤必有邻–论语﹒里仁
The Master Said, "Virtue is not left to stand alone, for those who practice it will find neighbors."–Analects 4:25

RESEARCH

In exploring economic problems, I hold the view that theory is a shared abstract which connects and synergizes diverse phenomena. Moreover, I believe that in achieving such connections and synergies, theoretical and empirical approaches complement and inspire each other. Theory seeks in-depth unity; evidence reveals in context diversity. Guided by this philosophy, I am striving to become a microeconomist with a broad theoretical and empirical overview, particularly, but not restricted to, decision theory, game theory, mechanism design, industrial organization, and experimental economics. I have an abiding passion for formal modeling of bounded rationality and its applications. I am also keenly interested in transdisciplinary collaborations and transferring profound insights into practical impacts. 

“Money Maker or Penny Pincher: On the Psychological Foundation of Poverty Traps

Evidence in psychology documents the effects of poverty on cognitive function. We explore further whether such effect translates into significant behavioral discrepancy on economic decisions. We hypothesize that psychological poverty triggers attention in favor of “pinch pennies” while against “make money” and experimentally test it. Our result shows that priming to induce thoughts about finances increases the choices of “pinch pennies” among the poor but not in well-off participants. Meanwhile, priming worsens time management and performance in decision tasks. Since both identified sources can further perpetuate poverty, our results attend to alleviating the psychological burdens of the poor and triggering internal motivations to make money in policy consideration.

Paper   

Partition Obvious Preference and Mistrust in Mechanism Design: Theory and Experiment

Substantial evidence in field, lab and thought experiments in multiple disciplines, shows that decision makers often choose a dominated strategy, which contradicts with current economic theory. To bridge this gap between theory and evidence, first, we propose two alternative axiomatic approaches, formalizing a distinct defect in human reasoning and tying together a broad range of evidence for the choice of dominated strategies. Second, we extend the theory to game theory and mechanism design, where we identify a rich class of mechanisms that successfully achieve desirable goals even with boundedly rational agents or agents who mistrust the market makers. Third, we test and verify our theory and its implications by a laboratory experiment. Finally, we address how our approach contributes to accomplishing two goals simultaneously in modeling bounded rationality: stimulating transdisciplinary conversations and providing a unified framework.  (with Dan Levin)

Paper   Slides

Bridging Level-K to Nash Equilibrium

We propose a new solution concept, NLK that connects Nash Equilibrium (NE) and Level-K. It allows a player in a game to believe that her opponent may be either less- or as sophisticated as, she is-a view with support in psychology. We apply it to data from four published papers on static, dynamic and auction games. NLK provides different predictions than those of NE and Level-K. Moreover, a simple version of it explains the experimental data better in many cases, with the same or lower number of parameters. We discuss extensions to games with more than two players and heterogeneous beliefs. (with Dan Levin)

Paper   Slides

Bounded Rationality and Robust Mechanism Design: An Axiomatic Approach

We propose an axiomatic approach to study the superior performance of mechanisms with obviously dominant strategies to those with only dominant strategies. Guided by the psychological inability to reason state-by-state, we develop Obvious Preference as a weakening of Subjective Expected Utility Theory. We show that a strategy is obviously dominant if and only if any Obvious Preference prefers it to any deviating strategy at any reachable information set. Applying the concept of Nash Equilibrium to Obvious Preference, we propose Obvious Nash Equilibrium to identify a set of mechanisms that are more robust than mechanisms with only Nash Equilibria.

Available at American Economic Review: Papers & Proceedings

Pay for Non-instrumental Information: An Experimental Study

We investigate willingness to pay for information that is not beneficial to rational decision makers. We focus on a situation where decision makers might fail to form hypothetical scenarios or to reason state-by-state. In that situation, accounting for the cognitive cost of reasoning may explain why non-instrumental information, in theory, might nevertheless be important for bounded rational players. We design a new version of Prisoner’s Dilemma games with incomplete information and compare the subjects’ demand for extra information when there is either just a dominant strategy or a stronger solution concept, an obviously dominant strategy. We also incorporate three Cognitive tests from Psychology and SAT scores to further explore behavioral differences across subjects. Our design controls alternative explanations such as other-regarding preference, willingness to pay for confidence, and early resolution of uncertainty. (in progress)

NSF Award    NSF proposal

Attention and Information Partitioning in Game Theory: An Eye-tracking Study

We propose an eye-tracking experiment to test a recent innovation in game theory and characterize different types of decision makers. This innovation captures decision makers’ heterogeneous sub-optimal behaviors, by allowing different people to have varying levels of cognitive abilities with respect to the coarseness of their information-partitioning. Moreover, the theory suggests that presenting the same game in proper information-partitioning might help people who reason in coarser partitions figure out optimal choices. However, by observing subjects’ choices alone, the theory cannot always distinguish between different types of decision makers. To solve this identification issue, we incorporate eye-tracking technology from Neuroscience into our design and complement choice data, using cascade- and fixation records. Meanwhile, we test whether varying the information-partitioning presenting the same game can affect subjects’ information searching patterns, leading to desirable outcomes. (with James Wei Chen)

in progress