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Coordination in a Repeated Stochastic Game with Imperfect Monitoring

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  • Anke Gerber
  • Thorsten Hens
  • Bodo Vogt

Abstract

We 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.

Suggested Citation

  • Anke Gerber & Thorsten Hens & Bodo Vogt, "undated". "Coordination in a Repeated Stochastic Game with Imperfect Monitoring," IEW - Working Papers 126, Institute for Empirical Research in Economics - University of Zurich.
    • Handle: RePEc:zur:iewwpx:126
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    File URL: https://www.econ.uzh.ch/apps/workingpapers/wp/iewwp126.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Coordination games; behavioral equilibrium selection; experimental asset markets; behavioral finance; investor sentiment; technical analysis;
    All these keywords.

    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; Information and Knowledge; Communication; Belief; Unawareness
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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