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Cursed Equilibrium

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Author Info
Erik Eyster (University of California, Berkeley)
Matt Rabin (University of California, Berkeley)
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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Paper provided by EconWPA in its series Method and Hist of Econ Thought with number 0303002.

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Date of creation: 19 Mar 2003
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Handle: RePEc:wpa:wuwpmh:0303002

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B49 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Other

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  1. Timothy J. Feddersen & Wolfgang Pesendorfer, 1995. "The Swing Voter's Curse," Discussion Papers 1064, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
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  2. Jacobsen, Ben & Potters, Jan & Schram, Arthur & van Winden, Frans & Wit, Jorgen, 2000. "(In)accuracy of a European political stock market: The influence of common value structures," European Economic Review, Elsevier, vol. 44(2), pages 205-230, February. [Downloadable!] (restricted)
  3. Potters, J. & Wit, J., 1996. "Bets and bids : favorite-longshot bias and winner's curse," Discussion Paper 4, Tilburg University, Center for Economic Research. [Downloadable!]
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  4. 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. [Downloadable!] (restricted)
  5. Dyer, Douglas & Kagel, John H & Levin, Dan, 1989. "A Comparison of Naive and Experienced Bidders in Common Value Offer Auctions: A Laboratory Analysis," Economic Journal, Royal Economic Society, vol. 99(394), pages 108-15, March. [Downloadable!] (restricted)
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  6. Dekel, E. & Piccione, M., 1999. "Sequential Voting Procedures in Symmetric Binary Elections," Papers 3-99, Tel Aviv.
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  7. 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. [Downloadable!]
  8. Christopher Avery & John H. Kagel, 1997. "Second-Price Auctions with Asymmetric Payoffs: An Experimental Investigation," Journal of Economics & Management Strategy, Blackwell Publishing, vol. 6(3), pages 573-603, 09. [Downloadable!] (restricted)
  9. Klemperer, P., 1999. "Auction Theory: a Guide to the Literature," Economics Papers 1999-w12, Economics Group, Nuffield College, University of Oxford.
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  10. Robert Forsythe & R. Mark Isaac & Thomas R. Palfrey, 1989. "Theories and Tests of "Blind Bidding" in Sealed-Bid Auctions," RAND Journal of Economics, The RAND Corporation, vol. 20(2), pages 214-238, Summer. [Downloadable!] (restricted)
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  11. Timothy Feddersen & Wolfgang Pesendorfer, 1997. "Voting Behavior and Information Aggregation in Elections with Private Information," Econometrica, Econometric Society, vol. 65(5), pages 1029-1058, September.
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  12. Milgrom, Paul R & Weber, Robert J, 1982. "A Theory of Auctions and Competitive Bidding," Econometrica, Econometric Society, vol. 50(5), pages 1089-1122, September. [Downloadable!] (restricted)
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  1. Biais, Bruno & Hilton, Denis & Mazurier, Karine & Pouget, Sébastien, 2004. "Judgmental Overconfidence, Self-Monitoring and Trading Performance in an Experimental Financial Market," IDEI Working Papers 259, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
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