Averting economic collapse and the solipsism bias
AbstractWe study the behavior of experimental subjects who have to make a sequence of risky investment decisions in the presence of network externalities. Subjects follow a simple heuristic-investing after positive experiences and reducing their propensity to invest after a failure. This result contrasts with the theoretical findings of Jeitschko and Taylor [Jeitschko, T.D., Taylor, C., 2001. Local discouragement and global collapse: A theory of coordination avalanches. Amer. Econ. Rev. 91 (1), 208-224] in which even agents who have only good experiences eventually stop investing because they account for the fact that others with worse experiences will quit. This can trigger sudden economic collapse-a coordination avalanche-even in the most efficient Bayesian equilibrium. In the experiment, subjects follow their own experiences and disregard the possible bad experiences of others-thus exhibiting behavior that we term "solipsism bias." Solipsism results in sustained investment activity and thus averts complete collapse. (c) 2005 Elsevier Inc. All rights reserved.
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Bibliographic InfoPaper provided by University College London in its series Open Access publications from University College London with number http://discovery.ucl.ac.uk/14595/.
Date of creation: Nov 2006
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Publication status: Published in GAME ECON BEHAV (2006-11) v.57, p.264-285
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