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

  • 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)

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

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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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