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Can fear cause economic collapse? Insights from an experimental study


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  • Guarino, Antonio
  • Huck, Steffen
  • Jeitschko, Thomas D.


We 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 (2001) in which even agents who have only good experiences eventually stop investing because they are afraid that others with worse experiences will quit. In theory, this Bayesian fear can trigger sudden economic collapse – even in the most efficient Bayesian equilibrium. In the experiment, subjects are surprisingly fearless of others’ experiences, and simply follow their own experiences, thus averting a total collapse. -- Wir untersuchen das Verhalten experimenteller Subjekte, die in Anwesenheit von Netzexternalitäten (externen Effekten) eine Reihe von riskanten Investitionsentscheidungen machen sollen. Die Subjekte folgen einer einfachen Heuristik – sie investieren nach positiven Erfahrungen, nach einem Misserfolg reduzieren sie ihre Investitionsneigung. Diese Resultate stehen im Gegensatz zu den theoretischen Befunden von Jeitschko und Taylor (2001), in welchen sogar die Agenten, die ausschließlich positive Erfahrungen gemacht haben, schließlich aufhören zu investieren, weil sie Angst haben, dass die anderen, mit schlechteren Erfahrungen, ausscheiden werden. Theoretisch kann diese Bayesianische Angst einen plötzlichen Wirtschaftszusammenbruch auslösen – auch in dem effizientesten Bayesianischen Gleichgewicht. Im Experiment sind die Subjekte überraschend furchtlos bezüglich der Erfahrungen der anderen. Sie folgen einfach nur eigenen Erfahrungen und verhindern so den totalen Zusammenbruch.

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Bibliographic Info

Paper provided by Social Science Research Center Berlin (WZB) in its series Discussion Papers, Research Unit: Market Processes and Governance with number SP II 2004-05.

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Date of creation: 2004
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Handle: RePEc:zbw:wzbmpg:spii200405

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Related research

Keywords: Coordination; coordination avalanche; economic collapse; experimental economics; network externalities;

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  1. Van Huyck, John B. & Cook, Joseph P. & Battalio, Raymond C., 1997. "Adaptive behavior and coordination failure," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 32(4), pages 483-503, April.
  2. Curtis R. Taylor & Thomas D. Jeitschko, 2001. "Local Discouragement and Global Collapse: A Theory of Coordination Avalanches," American Economic Review, American Economic Association, American Economic Association, vol. 91(1), pages 208-224, March.
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Cited by:
  1. Mathias Drehmann & Jörg Oechssler & Andreas Roider, 2005. "Herding with and without Payoff Externalities - An Internet Experiment," Working Papers, University of Heidelberg, Department of Economics 0420, University of Heidelberg, Department of Economics, revised Apr 2005.


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