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

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Author Info
Asen Ivanov () (Department of Economics, VCU School of Business)
Dan Levin () (Department of Economics, The Ohio State University)
James Peck () (Department of Economics, The Ohio State University)

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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 QRE.

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Publisher Info
Paper provided by VCU School of Business, Department of Economics in its series Working Papers with number 0801.

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Length: 40 pages
Date of creation: Jan 2008
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Publication status: Forthcoming in American Economic Review
Handle: RePEc:vcu:wpaper:0801

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Related research
Keywords: endogenous timing investment; level-k model; cursed equilibrium; quantal response equilibrium; rules of thumb;

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Find related papers by JEL classification:
C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information

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References listed on IDEAS
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  1. Park, Andreas & Sgroi, Daniel, 2008. "Herding and Contrarianism in a Financial Trading Experiment with Endogenous Timing," The Warwick Economics Research Paper Series (TWERPS) 868, University of Warwick, Department of Economics. [Downloadable!]
    Other versions:
  2. Asen Ivanov & Dan Levin & Muriel Niederle, 2008. "Can Relaxation of Beliefs Rationalize the Winner’s Curse?: An Experimental Study," Working Papers 0803, VCU School of Business, Department of Economics, revised Dec 2009. [Downloadable!]
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