Department/School
Accounting
Date of this version
7-30-2013
Document Type
Working Paper
Keywords
finance, entropy, societal order
Abstract
This paper studies how successive generations of laboratory societies organize themselves when given reports of financial transactions from previous generations. We define an increase in societal organization as a reduction in the entropy of the distribution of amounts sent and returned by successive generations of players in the Investment Game. Our entropy analysis of data from Berg, J., Dickhaut, J., and McCabe, K. (1995. Trust, Reciprocity, and Social History. Games and Economic Behavior, 10, 122-142) indicate that the provision of a financial history reduced the entropy of the amounts sent by Investors, amounts returned by Stewards, and the amounts in the joint Investor/Steward distribution. We then gathered new data over five societal generations to test the predictive power of our hypothesis that financial histories provide a basis for developing societal order. Participants in Session I (the first generation) received no financial history, whereas participants in the subsequent Sessions II-V received a report that summarized the financial history of the immediately preceding session. The amounts sent by Investors and returned by Stewards increased over the five sessions and produced greater overall societal wealth, but entropy declined significantly only in the amounts sent by Investors. The concluding section discusses the implications of our results and identifies opportunities for future research.