Can Relaxation of Beliefs Rationalize the Winner's Curse?: An Experimental Study

Econometrica (Impact Factor: 3.5). 01/2010; 78(4):1435-1452. DOI: 10.2307/40928444
Source: RePEc

ABSTRACT We use a second-price common-value auction, called the maximal game, to experimentally study whether the winner's curse (WC) can be explained by models which retain best-response behavior but allow for inconsistent beliefs. We compare behavior in a regular version of the maximal game, where the WC can be explained by inconsistent beliefs, to behavior in versions where such explanations are less plausible. We find little evidence of differences in behavior. Overall, our study casts a serious doubt on theories that posit the WC is driven by beliefs. Copyright 2010 The Econometric Society.

  • Source
    [Show abstract] [Hide abstract]
    ABSTRACT: Most applications of game theory assume equilibrium, justified by presuming either that learning will have converged to one, or that equilibrium approximates people's strategic thinking even when a learning justification is implausible. Yet several recent experimental and empirical studies suggest that people's initial responses to games often deviate systematically from equilibrium, and that structural nonequilibrium "level-k" or "cognitive hierarchy" models often out-predict equilibrium. Even when learning is possible and converges to equilibrium, such models allow better predictions of history-dependent limiting outcomes. This paper surveys recent theory and evidence on strategic thinking and illustrates the applications of level-k models in economics. (JEL C70, D03, D82, D83)
    Journal of Economic Literature 03/2013; 51(1-1):5-62. DOI:10.1257/jel.51.1.5 · 9.24 Impact Factor
  • [Show abstract] [Hide abstract]
    ABSTRACT: As demonstrated by the email game of Rubinstein (1989), the predictions of the standard equilibrium models of game theory are sensitive to assumptions about the fine details of the higher order beliefs. This paper shows that models of bounded depth of reasoning based on level-k thinking or cognitive hierarchy make predictions that are independent of the tail assumptions on the higher order beliefs. The framework developed here provides a language that makes it possible to identify general conditions on depth of reasoning, instead of committing to a particular model such as level-k thinking or cognitive hierarchy.
    Journal of Economic Behavior & Organization 12/2014; DOI:10.1016/j.jebo.2014.09.002 · 1.01 Impact Factor
  • Source
    [Show abstract] [Hide abstract]
    ABSTRACT: How is one's cognitive ability related to the way one responds to strategic uncertainty? We address this question by conducting a set of experiments in simple 2 × 2 dominance solvable coordination games. Our experiments involve two main treatments: one in which two human subjects interact, and another in which one human subject interacts with a computer program whose behavior is known. By making the behavior of the computer perfectly predictable, the latter treatment eliminates strategic uncertainty. We find that subjects with higher cognitive abilities are more sensitive to strategic uncertainty than those with lower cognitive abilities.

Full-text (2 Sources)

Available from
Sep 9, 2014