Ulric B. and Evelyn L. Bray Social Sciences Seminar
Abstract: Across a variety of contexts decision-makers exhibit a robust failure to understand the interaction of private information and strategy. Such failures have generally been observed in static settings, where participants fail to think through a future hypothetical, with closer response to theory in sequential settings. We use a laboratory experiment to examine a common-value matching environment where strategic thinking is entirely backward looking, and adverse selection is a dynamic, non-stationary process. While a minority of subjects do condition on time, reflecting an introspective rather than learned solution to the problem, the majority of subjects use a sub-optimal stationary response, even after extended experience and feedback. Though unreactive to time, stationary subjects' responses do exhibit strong learning effects. After outlining a misspecified model of the world that describes these subjects' steady-state behavior, we construct two further treatments that validate this learning model out of sample.
Research performed with Felipe A. Araujo and Alistair J. Wilson.