# Humboldt-Universität zu Berlin - Wirtschaftswissenschaftliche Fakultät

You are now in the third part of the experiment. In this part we ask you to make a disinvestment decision.

Imagine that you have built up a small business as a secondary job. This business generates a profit every year. At the beginning of the first year (year 0), this profit is 1 000 points. How the profit develops in the following year depends on a random mechanism. After each year, the profit can either increase or decrease by 500 points. The probability for each event is 50%. This can be compared to a coin toss that decides whether the profit goes up (e.g. heads) or down (e.g. tails).
This means that in year 1 you earn either 1 500 points or 500 points with a probability of 50% each. In the following year, the profit can increase or decrease again by 500 points. For example, if it decreases to 500 points in the first year, it can either increase to 1 000 points or decrease to 0 points in the second year. If the profit falls to 0 points in the second year, a profit of 500 points or a loss of -500 points is possible in the third year.
Therefore, negative points can also be generated, which are then deducted from the profits of the previous years. That means, if your business loses money in the game, then the lost points correspond to losing real money in the experiment that might be otherwise paid out to you at the end of the study.

You firmly intend to retire in 10 years. This means that you will sell the company at that time at the latest. Until that time, you will receive interest on all profits. Therefore, your decision horizon is 10 years.

For reasons of simplification, the profit in each year is subject to an interest rate of 10% per year. The interest rate and the number of interest-bearing periods result in an interest rate factor.
This is calculated from (1 + interest rate) number of interest-bearing periods

Since the decision horizon is 10 years, your initial profit from year 0 will earn an interest at 10% per year for 10 years. This results in an interest factor of 1,110 = 2,59374.
Your profit from year 1 will earn interest at 10% per year for 9 years (1,19 = 2,36).
Your profit from year 2 will earn interest at 10% per year for 8 years (1,18 = 2,14).
And so on...
This results in the following interest factors:

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Number of
interest
periods
10 9 8 7 6 5 4 3 2 1 0
interest
rate factor
1,110 =
2,59
1,19 =
2,36
1,18 =
2,14
1,17 =
1,95
1,16 =
1,77
1,15 =
1,61
1,14 =
1,46
1,13 =
1,33
1,12 =
1,21
1,11 =
1,1
no interest

You can also decide to close down the company after each year. You will then receive a one-time liquidation value of 11 000 points. You will automatically receive this liquidation value at the end of the 10th year, because then you will retire from the game and your company will automatically be closed down. But you may decide to liquidate earlier. The liquidation value is paid independently of the prior profits. That means, you will receive 11 000 points no matter how the business’ profits developed before. If you close down your company before the end of the 10th year, the liquidation value of 11 000 points will earn 10% interest per year until the end of the decision period. If you decide to close down the company before the end of the 10 years, this decision is irreversible. You will no longer be able to generate (periodic) profits.

Thus, you have to decide in each year: Do you want to continue the business and generate further profits or do you want to close down the business and receive the one-time liquidation value.

Your decision is relevant for your potential payout. If you decide to continue the business, a random mechanism determines in each year whether your profit will increase or decrease by 500 points in the following year. You can think of this as a coin toss that determines after each year whether your profit will increase or decrease by 500 points compared to the previous year. This imaginary coin toss takes place for each player after each period. The profits therefore develop differently for each participant.
At the end, your potential payout corresponds to all accumulated, interest-bearing profits and the (interest-bearing) liquidation value of the company. The number of periods for which interest is paid on the liquidation value depends on the period in which you disinvest from the company.

Your payout depends directly on the points earned. 120 points are equivalent to 1 euro.
As in the previous parts, 3 participants will be drawn at the end of the study for this part, too, and will actually be paid out with real money.

You can now see an example for the calculation of profits for 3 periods over 2 years. In addition to the initial profit of 1 000 points (in year 0), there was a profit of 500 points in year 1 and a profit of 1 000 points in year 2. Then the company was closed down. This has resulted in the following points and payoffs.
Note: this is only an example.

Year Profit in
this year
Company
continued
Liquidation
value
Sum of points
(with interest)
Points in euro
(120 points = 1 euro)
0 1 000 points yes 0 points
(not closed down)
1 000 * 1,110 =
2 593,74 points
2 593,74 / 120 =
21,61 euro
1 500 points yes 0 points
(not closed down)
500 * 1,19 =
1 178,97 points
1 178,97 / 120 =
9,82 euro
2 1 000 points no 11 000 points

1 000 * 1,18 =
2 143,59 points

11 000 * 1,18 =
23 579,48 points
2 143,59 / 120 =
17,86 euro

23 579,48 / 120 =
196,50 euro

In this example, the following profit was accumulated:
• 2 593,74 + 1 178,97 + 2 143,59 + 23 579,48 = 29 495,78
When converting 120 points into 1 euro, this results in a profit of
• 21,61 € + 9,82 € + 17,86 € + 196,50€ = 245,79 €

Now it's up to you to decide! If you are drawn for this game at the end of the experiment, you will win real money.

Imagine you have run your business for 5 years. On the following page, we will show you the development of your business during these 5 years.
Afterwards, you can decide in each of the remaining 5 years, depending on the random profits that occur at that time, whether you want to continue running the business or close it down. Thus, it is your decision whether the company will continue to exist and generate further profits/losses or whether the company will be closed.
If you decide to continue the business, a random mechanism determines how the payouts will develop in the individual periods. You will receive feedback on the profits/losses made after each year.
If you then decide to close down the company, the game will end. You will not be able to generate any further profits, and instead receive the liquidation value. These will earn interest for the remaining duration of the game (until the end of the 10th year), as well as the sum of your previously generated profits, including interest.