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Georg Weizsäcker (Humboldt-Universität zu Berlin) – "Cursed Bets on Markets", joint work Philipp Albert, Miguel Costa-Gomes and Steffen Huck

October 5, 2017 @ 2:00 pm - 5:30 pm | Organizer: Guillaume HOLLARD

The Malinvaud-Adres Seminars: Every Thursday at 2:00 pm
Time: 2:00 pm – 3:30 pm
Date: 05th of October 2017
Place: Room 3001
Georg Weizsäcker (Humboldt-Universität zu Berlin) – “Cursed Bets on Markets”, joint work Philipp Albert, Miguel Costa-Gomes and Steffen Huck
Abstract: In many economic situations an agent’s payoff depends on the outcome of a market interaction between other agents. Our experiment assesses the extent to which subjects’ decisions reflect their ability to predict the equilibrium of such outcome, where the relevant interaction is between a seller and a buyer that can be one of two types. We find that subjects make the optimal choice as long as the equilibrium prediction of the market interaction, be it a separating or a pooling one, coincides with that of cursed equilibrium (Eyster and Rain, 2005). When they do not coincide, subjects’ decisions reveal that they fall prey to cursed reasoning. Overall, the cursed equilibrium prediction matches the majority choice in each of 28 binary choice tasks, versus 20 out of 28 possible hits for the Bayes-Nash prediction. The bias is substantially reduced in an economically equivalent treatment where Bayesian rationality involves only first-order beliefs about other agents, indicating a way in which the empirical prevalence of cursed reasoning depends on the complexity of the solution.
Guillaume HOLLARD (CREST – Ecole Polytechnique)