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Cursed Equilibrium

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  • Eyster, Erik
  • Rabin, Matthew

Abstract

There is evidence that people do not fully take into account how other people’s actions are contingent on these others’ information. This paper defines and applies a new equilibrium concept in games with private information, "cursed equilibrium", which assumes that each player correctly predicts the distribution of other players’ actions, but underestimates the degree to which these actions are correlated with these other players’ information. We apply the concept to common-values auctions, where cursed equilibrium captures the widely observed phenomenon of the winner’s curse. We also show how cursed equilibrium predicts other empirically observed phenomena, such as trade in adverse-selection settings where conventional analysis predicts no trade, and "naïve" voting in elections and juries where rational-choice models predict that voters fully take into account the informational content in being pivotal.

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Bibliographic Info

Paper provided by Department of Economics, Institute for Business and Economic Research, UC Berkeley in its series Department of Economics, Working Paper Series with number qt7p2911dn.

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Date of creation: 02 Aug 2002
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Handle: RePEc:cdl:econwp:qt7p2911dn

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Keywords: curses;

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References

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  1. Dyer, D. & Kagel, J.H. & Levin, D., 1988. "A Comparison Of Naive And Experienced Bidders In Common Value Offer Auctions A Laboratory Analysis," Papers 11, Houston - Department of Economics.
  2. Forsythe, Robert & Isaac, R. Mark & Palfrey, Thomas R., 1987. "Theories and Tests of (Blind Bidding) in Sealed Bid Auctions," Working Papers 670, California Institute of Technology, Division of the Humanities and Social Sciences.
  3. Garvin, Susan & Kagel, John H., 1994. "Learning in common value auctions: Some initial observations," Journal of Economic Behavior & Organization, Elsevier, vol. 25(3), pages 351-372, December.
  4. Timothy Feddersen & Wolfgang Pesendorfer, 1996. "Convicting the Innocent: The Inferiority of Unanimous Jury Verdicts," Discussion Papers 1170, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  5. Paul Milgrom & Robert J. Weber, 1981. "A Theory of Auctions and Competitive Bidding," Discussion Papers 447R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. Timothy Feddersen & Wolfgang Pesendorfer, 1997. "Voting Behavior and Information Aggregation in Elections With Private Information," Levine's Working Paper Archive 1560, David K. Levine.
  7. Paul Klemperer, 1999. "Auction Theory: A Guide to the Literature," Microeconomics 9903002, EconWPA.
  8. Eddie Dekel & Michele Piccione, 1997. "On the Equivalence of Simultaneous and Sequential Binary Elections," Discussion Papers 1206, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. Feddersen, Timothy J & Pesendorfer, Wolfgang, 1996. "The Swing Voter's Curse," American Economic Review, American Economic Association, vol. 86(3), pages 408-24, June.
  10. Potters, J.J.M. & Jacobsen, B. & Schram, A. & Winden, F.A.A.M. van & Wit, J., 2000. "(In)accuracy of a European political stockmarket: The influence of common value structures," Open Access publications from Tilburg University urn:nbn:nl:ui:12-86743, Tilburg University.
  11. Levin, Dan & Kagel, John H & Richard, Jean-Francois, 1996. "Revenue Effects and Information Processing in English Common Value Auctions," American Economic Review, American Economic Association, vol. 86(3), pages 442-60, June.
  12. Lind, Barry & Plott, Charles R, 1991. "The Winner's Curse: Experiments with Buyers and with Sellers," American Economic Review, American Economic Association, vol. 81(1), pages 335-46, March.
  13. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
  14. Christopher Avery & John H. Kagel, 1997. "Second-Price Auctions with Asymmetric Payoffs: An Experimental Investigation," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(3), pages 573-603, 09.
  15. Athey, S., 1997. "Sigle Crossing Properties and the Existence of Pure Strategy Equilibria in Games of Incomplete Information," Working papers 97-11, Massachusetts Institute of Technology (MIT), Department of Economics.
  16. Eddie Dekel & Michele Piccione, 2000. "Sequential Voting Procedures in Symmetric Binary Elections," Journal of Political Economy, University of Chicago Press, vol. 108(1), pages 34-55, February.
  17. Ball, Sheryl B. & Bazerman, Max H. & Carroll, John S., 1991. "An evaluation of learning in the bilateral winner's curse," Organizational Behavior and Human Decision Processes, Elsevier, vol. 48(1), pages 1-22, February.
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