Coordination in a Repeated Stochastic Game with Imperfect Monitoring
AbstractWe consider a repeated stochastic coordination game with imperfect public monitoring. In the game any pattern of coordinated play is a perfect Bayesian Nash equilibrium. Moreover, standard equilibrium selection arguments either have no bite or they select an equilibrium that is not observed in actual plays of the game. We give experimental evidence for a unique equilibrium selection and explain this very robust finding by equilibrium selection based on behavioral arguments, in particular focal point analysis, probability matching and over-confidence. Our results have interesting applications in finance because the observed equilibrium exhibits momentum, reversal and excess volatility. Moreover, the results may help to explain why technical analysis is a commonly observed investment style.
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Bibliographic InfoPaper provided by Institute for Empirical Research in Economics - University of Zurich in its series IEW - Working Papers with number 126.
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Coordination games; behavioral equilibrium selection; experimental asset markets; behavioral finance; investor sentiment; technical analysis;
Find related papers by JEL classification:
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
- C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
- C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
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