Emergent Recordkeeping Changes the Course of Economic History
By
Sudipta Basu
John Dickhaut1
Gary Hecht
Ivo Tafkov
Kristy Towry
and
Gregory Waymire
NOTE: This paper is being prepared for submission to a science journal. The rest of the paper reports additional material that would be published online only as a supplement to the print article. This material is included as a separate document.
October 24, 2006 Please Do Not Quote
1 Dickhaut is affiliated with the Carlson School of Management at University of Minnesota. All other co-authors are affiliated with the Goizueta Business School of Emory University. We acknowledge financial support of this research from the Carlson School of Management and the Goizueta Business School. Emergent Recordkeeping Changes the Course of Economic History
Sudipta Basu, John Dickhaut‡, Gary Hecht, Ivo Tafkov, Kristy Towry, & Gregory Waymire
Physical recordkeeping is a deeply rooted and ubiquitous feature of exchange in modern economies. Artefacts from 10,000 years ago reveal a “paper trail” that arose in concert with increases in the scale and complexity of human interaction1-2. Despite recordkeeping’s pervasiveness, no economic theory implicates its necessity for economic exchange. Consequently, no scientific study demonstrates recordkeeping emerges naturally with exchange complexity and little is known about the economic forces unleashed by this simple, and often overlooked, economic institution. We demonstrate experimentally that recordkeeping emerges with complex exchange and then alters fundamentally the history of consummated exchange. A record of exchange serves as a useful mnemonic aid when people exchange repeatedly for several periods in a multi-agent setting. Agents act on better memory of partners’ past cooperation, leading to greater gains from exchange and increased commitment to and fairness in exchange. Ultimately, agents’ economic choices are conditioned on a fundamentally different history of past exchange in an economy in which recordkeeping is possible. Our findings (1) imply that an ability to keep records increases gains from multilateral repeated exchange and (2) demonstrate the powerful influence exerted by seemingly simple economic institutions that are frequently taken for granted.
Goizueta Business School, Emory University, 1300 Clifton Road NE, Atlanta, GA 30322
‡ Carlson School of Management, University of Minnesota, 321 19th Avenue South, Minneapolis, MN 55455 3
Economic exchange is necessary to establish the extensive human cooperation reflected in a specialized division of labour3. A puzzle engaging scholars from several fields has been how to explain the large-scale cooperative networks sustained by humans4. Some argue that a proclivity for punishment and numerous other features of human psychology are adapted to facilitate social exchange5. One of these adaptations is the human brain’s ability to remember and analyze the results of past interactions, which facilitates avoidance of previously known cheaters6-8. Cooperation is sustained by punishment or avoidance of those who violate norms of reciprocity and fairness9-12.
Recent work indicates institutions that sanction non-cooperation can extend the scale and scope of human cooperation13-14. This is consistent with arguments that emergent institutions vastly expand human capacity to sustain the cooperation that underlies extensive exchange and division of labour15-17. At the same time, research has not established the means by which human societies create the cultural analogue of neuronal memory18-19 and its effects on cooperative economic behaviour. Our experiment is designed to establish the importance of recordkeeping in sustaining beneficial exchange when multiple agents interact for several periods. Establishing this is important since we know that recordkeeping emerged coincidentally with the earliest complex human cultures1-2.
Our experimental design generates two comparisons. In the first comparison, we study a fundamental proposition derived from archaeological artefacts. That proposition is that more recordkeeping will emerge in a complex economy than in a simple economy. The second comparison asks how complex economies with recordkeeping differ from economies without recordkeeping. The intent of our design is to create a laboratory economy in which we can witness the birth of the modern 4
institution known as “accounting,” and see how our complex economy evolves differently when its most primitive ancestor has arisen20-23.
The building block for our economies is the two-player investment game24-27. In the original investment game, one investor is paired anonymously with one trustee for one period of play. Player 1, the investor, receives ten units of experimental currency, which are referred to as lira. The investor can decide how many lira out of the ten (in whole numbers) to send to Player 2, the trustee. The investment produces gains from exchange because it is tripled in route to the trustee. Thus, if the investor invested two (five) lira, the trustee would receive six (15) lira. The trustee can then decide how much of the amount received to return to the investor. Assuming self-interested players, the trustee should keep all that is received, and the investor anticipating the trustee’s inclination will send nothing. There is now a large body of evidence that suggests that the investor almost always sends something (often referred to as a form of trusting behaviour) and the trustee sends enough back so that the investor gets a positive rate of return28-29. This behaviour is referred to as positive reciprocity.
In our simple experimental economy the one period investment game between an investor and a trustee is repeated ten times with new endowments of ten lira each time (subjects are not told how many times the game will be repeated). Repeated interactions allow each player to use multi-period strategies, and memory of past outcomes can be useful in planning one’s own strategy and monitoring its performance, and inferring and responding to partners’ strategies. In our complex economy five subjects play the role of investor and five play the role of trustee. In each period, every investor has five separate endowments of 10 lira, one for each trustee. Each investor can take a different amount from each trustee endowment and send it to the respective trustee. Therefore, each trustee receives five tripled amounts, one from each of the five investors. Every trustee then decides, for each investor, how much of the amount 5
received to send back. Trustees cannot send money to an investor that exceeds the amount received from that investor in that period. In the complex economy, this process is repeated ten times with each investor reendowed each time.
The simple and complex economies are conducted using the computer software Z- tree whose windows are displayed on the left hand side of each subject’s computer screen30. To see if and when subjects choose to keep records, we position a running program, TextBox, on the right side of the computer screen. In both the complex and simple economy subjects are told they can type anything they want. (Experimental instructions are available in the supplemental materials.) Subjects could not use paper and pencils, so that any external records they kept were recorded electronically.
Figure 1 depicts the interactions between subjects in our complex economy where each investor (trustee) interacts with five different trustees (investors). We replicated our complex economy five times. These replications provided data from 50 subjects; 25 played the role of investor and 25 played the role of trustee. Within each replication, interactions occur in 25 distinct dyads, or 125 in total dyads across all five replications. We use the same number of subjects in replications of our simple economy (25 investors and 25 trustees). Because each subject interacts in only one dyad, there are 25 dyads that comprise simple economies.
Recordkeeping is expected to allow subjects to better remember past interactions in the presence of exchange complexity. We hypothesize that, when available, recordkeeping will be more likely adopted in the complex exchange condition than in the simple exchange condition. We also hypothesize that greater gains from exchange will result in the complex condition with recordkeeping than without recordkeeping. Recordkeeping allows a trustee to build a reputation because investors can better remember each trustee’s actions. Trustee reputation sustains investor commitment in a 6
multi-period setting. Consequently, the history of complex exchange will unfold differently with and without recordkeeping.
Emergent Recordkeeping and Economic Exchange
When recordkeeping was possible, thirty-nine subjects in the complex condition kept records as measured by any marks on their screen compared to only twenty-five in the simple condition (see Table 1, Panel A). We rejected the null hypothesis that a participant keeping records was equally likely to come from the complex and simple conditions using a Binomial test (one-tailed p = 0.052). (Details of all statistical tests are described in the supplemental materials.) This difference is greater for investors (one-tailed p = 0.061) than trustees (one-tailed p = 0.292). Because the Binomial test has low power, we replicated this comparison using a resampling procedure (bootstrapping) of the frequency of recordkeeping measured in the same manner. The bootstrap is based on 100,000 resamples with replacement, and corroborates evidence that the observed differences in recordkeeping frequency across the conditions are statistically significant (one-tailed p = 0.012 for all subjects, 0.001 for investors only, and 0.097 for trustees only).
Records can include evaluations of other participants’ intentions and can serve as a tool to categorize others’ behaviour (e.g., “2 and 4 are cheap”). The content of records depends on the complexity of the exchange setting (see Table 1, Panel B). Eleven of the 39 subjects who kept records in the complex condition recorded some form of judgment in their records. None of the subjects who kept records in the simple condition included such judgmental statements. A Binomial test rejects the null hypothesis (one-tailed p = 0.004) that judgmental recordkeepers were distributed randomly across the simple and complex conditions when the ex ante probability of a recordkeeper subject being in the complex condition was 60.9% (i.e., 39/64). 7
The evidence (see table 1) is consistent with the hypothesis that recordkeeping supplements memory when agents seek to track the behaviour of multiple trading partners over several periods. These results show that the relation between recordkeeping and exchange complexity is foundational.
Recordkeeping Increases the Gains from Complex Economic Exchange
We measure a given dyad’s gains from exchange as the amount that a dyad’s total payoff exceeds the minimum possible payoff as a percentage of the maximum possible increase they could have attained. The minimum total payoff is 100 lira (when the minimum investment of zero lira is chosen by the investor in each of the 10 rounds) and the maximum possible is 300 lira (when the maximum investment of 10 lira is chosen in every round and is subject to tripling). Thus, our measure ranges from zero percent when the dyad earns the minimum total of 100 lira to one hundred percent when the dyad achieves the maximum possible of 300 lira.
Table 2 shows that dyads in the complex condition with recordkeeping average greater gains from exchange (56.5%) than dyads in the complex condition without recordkeeping (49.9%). A Binomial test rejects the null hypothesis that the mean gain was equal across these two conditions (one-tailed p = .039). The 6.6% mean difference is economically important since it represents a 13.2% increase in gains from exchange when recordkeeping is possible for the average complex dyad. This evidence indicates that recordkeeping is a sustainable institution because it enables efficiencies in complex exchange. 8
Recordkeeping Promotes Commitment and Reciprocity in Exchange
The results in table 2 are due to investors that commit by making the maximum investment. Four hundred thirty maximum investments are made by investors in the recordkeeping condition compared to only 210 in the non-recordkeeping condition (see Figure 2, Panel A). Using a Binomial test, we reject the null hypothesis that a maximum investment is equally likely in the complex recordkeeping and complex non- recordkeeping conditions (p < 0 .0001).
Greater commitment by investors under recordkeeping is consistent with trustees’ subsequent behaviour. Trustees in the complex condition with recordkeeping are more likely to reciprocate by returning “fair” amounts (see Figure 2, Panel B). We define a fair return decision as one where the trustee evenly splits the amount received with the investor. We reject the null hypothesis that fair trustee choices are equally likely to come from the complex recordkeeping and complex no recordkeeping conditions using a Binomial test (one-tailed p < 0 .0001). This result also holds when fairness is defined relative to the total pie available (amount received by trustee plus amount retained by investor).
Recordkeeping promotes commitment and reciprocity, which generate the conditional cooperation observed in prior experiments and shown to persist in agent- based simulations24-27, 31-42. Recordkeeping availability increases trustee reciprocity as reflected in decisions to fairly divide economic gains in a complex exchange setting.
Recordkeeping Alters the History of Exchange
The impact of recordkeeping on the history of consummated exchange is starkly apparent in the correlations between an investor’s investment and the past average return on investment (ROI) realized by other investors (see Figure 3, Panel A). ROI is 9
the money received from a particular trustee as a fraction of the amount invested with that trustee. These correlations are large and positive in the complex exchange condition without recordkeeping. They are near zero when recordkeeping is possible. These differences are startling in two regards. First, the investor has never directly observed other investors’ ROIs. Second, these correlations differ by an order of magnitude between economies with and without recordkeeping. This pattern suggests that an investor’s decisions absent recordkeeping are influenced to a far greater degree by unseen remote events.
These correlation differences could arise if investors with recordkeeping are better able to clearly remember past interactions with specific trustees. In this case, the investor’s interactions with different trustees stay separated in memory and are influenced less by interactions with other trustees. Consistent with this interpretation, recordkeeping leads to more positive correlations between period 10 investments and past within-dyad ROI at lags of two or more periods (see Figure 3, Panel B). Also, correlations between period 10 investments and average lagged ROIs that the investor has obtained from other trustees are reliably positive (> .20) at lags of four periods or more without recordkeeping, but not with recordkeeping (see Figure 3, Panel C).43
A test of the null hypothesis that the correlation structures across the recordkeeping and non-recordkeeping conditions are equal is rejected (one-tailed p = . 004). Overall, the evidence in Figure 3 indicates that the economic history of exchange itself depends on the possibility and presence of recordkeeping. More broadly, this supports the view that institutions, in this case recordkeeping, fundamentally alter the course of economic history15-16. 10
Conclusions
Our findings have profound implications in two regards. First, our laboratory results provide direct causal support for the hypothesis suggested by archaeologists that basic technologies for storing transactional data through symbolic artefacts, and subsequently through writing, exert an important influence on the scale and complexity of human economic interaction. These findings complement work suggesting that evolved human institutions play a central role in sustaining the extraordinary level of cooperation and complex interaction that characterize humans relative to other species13. Thus, the emergence of an institution like recordkeeping can provide the basic informational inputs necessary to sustain reciprocity through image and reputation8, 44-45. Future experiments should consider the joint effect of recordkeeping, communication, and punishment institutions on the scale and complexity of human economic networks.
Second, our evidence reminds us that essential economic institutions lie at the lowest level of the institutional scaffold that humans have gradually erected through culture over thousands of years16. Our evidence highlights the importance of seemingly simple institutions. These institutions appear trivial and may not be recognized as important because their ubiquitous nature leads us to take them for granted. One such institution is the paper trail embodied in artefacts created to signify the consummation of exchange. We believe that understanding the cultural origins and subsequent evolution of this institution will contribute significantly to a comprehensive explanation for the unprecedented level of cooperation in our species4, 12. 11
Methods
We use a repeated version of the investment game in which each dyad plays ten consecutive rounds of a computerized game. No direct communication between subjects was allowed and subject names were never revealed. Each experimental session has ten subjects; five subjects are randomly assigned to be investors and the remaining five are assigned the role of trustee. Subjects interacted anonymously over a local computer network, programmed and conducted with the software z-Tree.
The experiments were conducted at the Center for Interuniversity Research and Analysis on Organization (CIRANO) in Montreal, Canada. CIRANO staff recruited participants and ran twenty sessions (five sessions for each experimental condition) during November and December 2005. Subjects were recruited by CIRANO from a standard subject pool and their identities remain anonymous to the authors. Two hundred subjects (115 males and 85 females) participated in the experiment. The average age of the subjects was 25.5 years and 78 (39%) were 26 years of age or older. One hundred fifteen subjects were graduate students, eighty-two were undergraduates, and three were non-students. One hundred sixty-four subjects had been subjects in a prior experiment at CIRANO.
Both Recordkeeping (Possible or Not Possible) and Exchange Complexity (Simple or Complex) were manipulated, which resulted in four experimental conditions. Five experimental sessions were for each condition. In the sessions where recordkeeping is possible, all subjects are provided the software Textbox, which allows them to type in any marks they desire. Whether a subject kept records was measured by whether any marks were made on his/her screen at any time during the experimental session. 12
In a simple exchange condition, each investor interacts with only a single trustee, and so each session provides data on play by five exchange dyads (with ten subjects) for ten periods. Subjects are informed only of their direct trading partners’ decisions, and not those of other players in the session. In a complex exchange condition session, each investor is simultaneously matched with each of the five trustees and vice versa. Subjects in the complex conditions are notified only of others’ decisions that affect their own payoffs. For example, Trustee B1 learns how much money Investor A1 has chosen to send to him/her, but not how much Investor A1 sent to the other trustees, B2 through B5. Each complex condition session provides data on play by five investors and five trustees for ten periods; however, unlike the simple setting, play occurs in 25 exchange dyads because each subject is making choices within five different dyads.
In each condition-specific experiment-session, the ten participants received and read written experiment instructions. Participants then took a quiz to ensure sufficient understanding of experiment instructions. The experiment facilitator checked quiz answers and resolved discrepancies privately before the beginning of the first round. The facilitator collected all instructions and quizzes and ensured participants had no other materials or writing instruments available. A condition-specific, short-form version of experiment instructions was taped to the wall next to the computer monitor.
Each condition-specific experiment-session included 10 trading periods. Participants were not informed of the number of periods to mitigate end game effects, although they were informed via recruiting materials that the experiment would last approximately two hours. No experiment-session lasted longer than 90 minutes.
Each trading period began with investors deciding how much of 10 units of experiment-currency (i.e., lira) to invest in the paired trustee(s). In the complex condition, investors had five separate endowments of ten lira for each of the five trustees with whom the investor was paired. All investors’ investment decisions were 13
required before trustees received investment information. Similarly, all trustees’ “return” decisions were required before both player types received feedback information. Investors received feedback information in the form of what each paired- trustee sent. Trustees received feedback information in the form of what was received from each paired-investor (i.e., the tripled investment amount). The next trading period began once all participants confirmed they were finished reviewing feedback.
At the end of the tenth trading period, participants completed a short questionnaire containing strategy-oriented and demographic questions. Total earned lira was converted to cash at a rate that varies by experimental condition to equalize the maximum possible payout per participant across sessions. Since each participant in the complex setting participates in five dyads each period, we set the conversion rate in the complex setting at one-fifth that of the simple setting. 14
Endnotes
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18 M. Donald, Origins of the Modern Mind: Three Stages in the Evolution of Culture and Cognition
(Harvard University Press, Cambridge, MA, 1991). 15
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Durham, NC, 2000).
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43 The evidence in figure 3 parallels findings from financial economics that stock prices in developed economies impound large amounts of firm-specific information, in contrast to less developed economies where stock prices exhibit strong common market-wide commonalities. See R. Morck and B.Yeung,
World Economics 3 (3): 1-15 (2002.
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Acknowledgements
Financial support for Basu, Hecht, Tafkov, Towry, and Waymire was provided by the Goizueta School at
Emory University. Financial support for Dickhaut was provided by the Carlson School at the University of Minnesota. We are grateful for the help and support provided by the staff at CIRANO in Montreal who helped in running our experiment. We benefited from comments and suggestions by attendees in presentations of earlier versions of this research at the meetings of the American Accounting Association,
Economic Science Association, and the Human Behavior and Evolution Society. We also benefited from interactions at workshops presented at the 2006 Mini-Conference on the Foundations of Accounting at the
Goizueta Business School of Emory University, the Emory University Anthropology Department,
University of Arizona, City University of Hong Kong, City University of New York-Baruch, George
Washington University, Interdisciplinary Center for Economic Studies at George Mason University,
University of Iowa, London School of Economics, University of Minnesota, Norwegian School of
Economics, University of Notre Dame, Queen’s University (Canada), Temple University, University of
Texas-Dallas and Tilburg University. 17
Table 1
Adoption and content of records
Panel A Number of recordkeepers when recordkeeping was possible All Subjects Investors Only Trustees Only Complex 39 22 17 Exchange (61%) (65%) (57%) Simple 25 12 13 Exchange (39%) (35%) (43%)
Both 64 34 30 Conditions out of 100 out of 50 out of 50 Binomial .052 .061 .292 p-value The predicted directional relationship between complex exchange and the adoption of recordkeeping is confirmed in this setting. This table reports that in the complex setting, of the 50 subjects who could keep records, 39 chose to keep records. In the simple exchange setting, only 24 subjects kept records of the 50 agents who could. We report in parentheses the percentage of the recordkeepers in each column category in the complex and simple exchange conditions.
Panel B. The judgmental content of subjects’ records Records with Qualitative Judgments All Recordkeepers Complex 11 recordkeepers 39 recordkeepers Exchange (100%) (61%) Simple 0 recordkeepers 25 recordkeepers Exchange (0%) (39%) Both 11 total 64 total Conditions Binomial .004 p-value The predicted directional relationship between complex exchange and the inclusion of qualitative judgments in records is confirmed. This table shows that all of the 11 agents who recorded qualitative judgments were in the complex exchange condition. We report in parentheses the percentage of the recordkeepers in each column category in the complex and simple exchange conditions. We tested the null hypothesis that judgmental recordkeepers were distributed randomly across the simple and complex conditions when the ex ante probability of recordkeeper in the complex setting was 60.9% (i.e., 39/64). 18
Table 2
The value of recordkeeping Experimental Condition Mean Efficiency Gains Complex Exchange - Recordkeeping (No Recordkeeping) 56.5% (49.9%) p = .039
Simple Exchange - Recordkeeping (No Recordkeeping) 53.1% (52.6%) p = .374
The predicted relationship between the availability of recordkeeping and gains from exchange in the complex condition is confirmed. This table demonstrates that in the complex setting recordkeeping is associated with significantly increased mean gains from exchange. No significant differences in mean gains occur in the simple exchange setting. The method of conducting the statistical test is discussed in the supplementary materials. 19
Figure 1
Differences in Interactions Between and Complex Exchange Conditions Simple Exchange Complex Exchange Investors Trustees Investors Trustees A1 B1 A1 B1
A2 B2 A2 B2
A3 B3 A3 B3
A4 B4 A4 B4
A5 B5 A5 B5
This figure shows that investors interact with only a single trustee in the simple exchange condition and vice versa (see left panel). In the complex condition each investor and trustee play the investment game simultaneously with five trustees and five investors, respectively (see right panel). 20
Figure 2
Recordkeeping, Investor Trust and Trustee Fairness Panel A Frequency of investor commitment as reflected in maximum investments in the complex exchange condition
500
450
400
350 s n o
i 300 t v a v
r 250 e s b O
200 #
150
100
50
0
Complex Exchange with Complex Exchange without Recordkeeping, 34.4% Recordkeeping, 16.8% (N=430 of 1,250) (N=210 of 1,250)
Binomial p-value < .0001
A significant relationship between investor commitment and the availability of recordkeeping in the complex exchange condition is confirmed. This graph demonstrates that in the complex setting with recordkeeping, the frequency of maximum investments is over twice as great when recordkeeping is available than when recordkeeping is not possible. The method of conducting the Binomial test is discussed in the supplementary materials. 21
Panel B Percentage of cases where the trustee sends back a fair amount in the complex exchange condition
35.0% Recordkeeping 29.7% (303 of 1,021) 30.0% Recordkeeping 26.3% (269 of 1,021) 25.0%
20.0% No Recordkeeping 12.4% % No Recordkeeping 15.0% (129 of 1,042) 11.2% (117 of 1,042) 10.0%
5.0%
0.0% Even Split of Amount Received Even Split of Total Pie
Binomial p-value < .0001 for both definitions of fair trustee returns
A significant relationship between trustee fairness and the availability of recordkeeping in the complex exchange condition is confirmed. This graph demonstrates that in the complex setting with recordkeeping, the frequency of fair returns by trustees is over twice as great when recordkeeping is available than when recordkeeping is not possible. The method of conducting the Binomial test is discussed in the supplementary materials. 22
Figure 3 Recordkeeping and the Evolved History of Exchange Panel A Correlation of period 10 investment with other investors’ average past ROI
0.6
No 0.5 Recordkeeping
0.4
n 0.3 o i t a l e
r 0.2 r o C 0.1
0 1 2 3 4 5 6 7 8 9
-0.1 Recordkeeping
-0.2 Lag
This graph indicates more positive correlations between period 10 investments and past average ROI received by other investors when recordkeeping is not possible in a complex exchange condition. The more positive correlations for the no recordkeeping setting suggest that the spillover effect from remote unobserved exchanges influence investments to a far greater degree when recordkeeping is not possible.
Panel B Correlations of period 10 investment with past within-dyad ROI
0.6
0.5
0.4 n o i t a l e
r 0.3 r o
C Recordkeeping 0.2
No 0.1 Recordkeeping
0 1 2 3 4 5 6 7 8 9 Lag
This graph indicates that stronger positive correlations between period 10 investments and past within-dyad return on investment (ROI) are observed when recordkeeping is possible. The more positive correlations for the complex recordkeeping setting after a lag of one period suggest that a deeper history of past within dyad exchange influences investment when recordkeeping is possible. 23
Panel C Correlation of period 10 investment with average ROI received by investor from other trustees
0.5
0.4 No Recordkeeping 0.3
n 0.2 o i t a
l Recordkeeping e
r 0.1 r o C
0 1 2 3 4 5 6 7 8 9
-0.1
-0.2
-0.3 Lag
This graph indicates more positive correlations between period 10 investments and past average ROI received by the investor from other trustees after lag 4 when recordkeeping is not possible in a complex exchange condition. The more positive correlations for the no recordkeeping setting suggest that investors have more limited recall of the source of returns as the lag between investment and returns increases when recordkeeping is not possible.