A research team led by Associate Professor Yasuhiro Sato of the Graduate School of Economics of the University of Tokyo has analyzed how people's decisions made in economic settings are affected by whether they are told lies. The researchers conducted an experiment in which participants answered questionnaires regarding investments and gambles while researchers intentionally varied the truth of information subjects received.

"Many economic models assume people always rationally make decisions based on truthful information. But, in reality, people often encounter deception and must make their choices based on incomplete or even misleading information," says Professor Sato. "We were interested in how individuals' decisions and the overall economic outcomes are shaped when people know that they might be lied to."

The researchers recruited about 1600 participants and randomly divided them into two groups. One group was informed that the experimenter would tell the truth while the other was informed that the experimenter might occasionally deceive them.

The researchers found that participants in the group told they might be lied to made different decisions than those who were told the experimenter would not deceive them. For instance, when deciding between a safe option with a certain payoff and a risky option with a potential higher, albeit uncertain payoff, participants were less likely to choose the risky option if they thought they were possibly being deceived.

The researchers observed changes in decisions not just in one-shot decisions, but also in sequential decision-making where people could learn from past experiences. Even after learning whether past information was truthful or not, participants in the "possible deception" group still adjusted their decisions in a risk-averse way.

The researchers also analyzed how the decisions by individuals might affect the overall economy. They constructed a simple economic model that incorporates deception. The model predicts economic activities may become stagnant when there is no guarantee that information is truthful, as people tend to make less risky decisions.

"There is a delicate balance between the potential economic gains from interactions involving untruthful information and the potential losses due to a diminished incentive to trade when agents fear deception," says Professor Sato. "We hope that our research will contribute to future work studying how economic institutions and policies can encourage truthful behavior and facilitate efficient exchanges between people."

This research was supported in part by JSPS Kakenhi (20H01910, 18H05180, 21H00580), the Sumitomo Foundation, and Research Institute of Economy, Trade, and Industry (RIETI).