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Can fear cause economic collapse? Insights from an experimental study
[Kann Angst zu einem Wirtschaftszusammenbruch führen? Erkenntnisse aus einer experimentellen Studie]

Author

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

Abstract

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.

Suggested Citation

  • Guarino, Antonio & Huck, Steffen & Jeitschko, Thomas D., 2004. "Can fear cause economic collapse? Insights from an experimental study
    [Kann Angst zu einem Wirtschaftszusammenbruch führen? Erkenntnisse aus einer experimentellen Studie]
    ," Discussion Papers, Research Unit: Market Processes and Governance SP II 2004-05, Social Science Research Center Berlin (WZB).
  • Handle: RePEc:zbw:wzbmpg:spii200405
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    File URL: https://www.econstor.eu/bitstream/10419/51133/1/38574854X.pdf
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    References listed on IDEAS

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    1. Curtis R. Taylor & Thomas D. Jeitschko, 2001. "Local Discouragement and Global Collapse: A Theory of Coordination Avalanches," American Economic Review, American Economic Association, vol. 91(1), pages 208-224, March.
    2. Van Huyck, John B. & Cook, Joseph P. & Battalio, Raymond C., 1997. "Adaptive behavior and coordination failure," Journal of Economic Behavior & Organization, Elsevier, vol. 32(4), pages 483-503, April.
    3. Abhijit V. Banerjee, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, Oxford University Press, vol. 107(3), pages 797-817.
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    Cited by:

    1. Drehmann, Mathias & Oechssler, Jorg & Roider, Andreas, 2007. "Herding with and without payoff externalities -- an internet experiment," International Journal of Industrial Organization, Elsevier, vol. 25(2), pages 391-415, April.

    More about this item

    Keywords

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

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • E0 - Macroeconomics and Monetary Economics - - General
    • G0 - Financial Economics - - General

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