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Trading Participation Rights to the “Red Hat Puzzle”. An Experiment

Author

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  • Lawrence C. Y. Choo

    (Department of Economics, University of Exeter)

Abstract

This paper investigates the conventional wisdom that markets should allocate the rights for performing decisional tasks to those players who might be best suited to perform the task. I embed the decisional tasks in a stylised setting of a game, motivated by Littlewood (1953) Red Hat Puzzle, where the optimal choices in the game require players to employ logical and epistemological reasoning. I present a treatment where players are permitted to trade their participation rights to the game. The payo?s are furthermore calibrated such that those players who know the optimal choices in the game should value the participation rights strictly more than those who do not. However, aggregated performances in this treatment were found to be significantly lower than the control treatments where players were not permitted to trade their participation rights, providing little support for the conventional wisdom. I show that this finding could be attributed to price “bubbles” in the markets for participations rights.

Suggested Citation

  • Lawrence C. Y. Choo, 2014. "Trading Participation Rights to the “Red Hat Puzzle”. An Experiment," Discussion Papers 1408, University of Exeter, Department of Economics.
    • Handle: RePEc:exe:wpaper:1408
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    File URL: https://exetereconomics.github.io/RePEc/dpapers/DP1408.pdf
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    References listed on IDEAS

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    Cited by:

    1. Choo, Lawrence & Zhou, Xiaoyu, 2019. "Can market competition reduce anomalous behaviours," FAU Discussion Papers in Economics 08/2019, Friedrich-Alexander University Erlangen-Nuremberg, Institute for Economics.

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    More about this item

    Keywords

    Game Theory; Trading Markets; Experimental Economics; Red Hat Puzzle.;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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