Hindsight, Foresight, and Insight: An Experimental Study of a Small-Market Investment Game with Common and Private Values

Authors: Ivanov, Asen; Levin, Dan; Peck, James

Source: The American Economic Review, Volume 99, Number 4, September 2009 , pp. 1484-1507(24)

Publisher: American Economic Association

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Abstract:

We experimentally test an endogenous-timing investment model in which subjects privately observe their cost of investing and a signal correlated with the common investment return. Subjects overinvest, relative to Nash. We separately consider whether subjects draw inferences, in hindsight, and use foresight to delay profitable investment and learn from market activity. In contrast to Nash, cursed equilibrium, and level-k predictions, behavior hardly changes across our experimental treatments. Maximum likelihood estimates are inconsistent with belief-based theories. We offer an explanation in terms of boundedly rational rules of thumb, based on insights about the game, which provides a better fit than quantal response equilibrium.

Document Type: Research article

DOI: 10.1257/aer.99.4.1484

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