TY - JOUR
T1 - Belief formation
T2 - An experiment with outside observers
AU - Hyndman, Kyle
AU - Özbay, Erkut Y.
AU - Schotter, Andrew
AU - Ehrblatt, Wolf
PY - 2012/3
Y1 - 2012/3
N2 - In this paper we study the belief formation processes of a group of outside observers making predictions about the actions of a player involved in a repeated game. We document four main results. First, there is substantial heterogeneity in the accuracy of our observers, with average accuracy being quite poor. Second, while there is no difference between the most and the least accurate observer in their initial beliefs, there are striking differences in their belief updating rules. The most accurate observers have a well-formulated model of player behavior, are good at best responding and quickly incorporate new information to their beliefs. The worst observers behave in an opposite manner on all three fronts. Third, when the game does not converge, subjects look beyond historical actions to make predictions and place more emphasis on forgone payoffs. Finally, we document that a "collective wisdom" emerges when our data are pooled across subjects and analyzed. Specifically, the accuracy of the group estimates becomes much higher than that of the average observer.
AB - In this paper we study the belief formation processes of a group of outside observers making predictions about the actions of a player involved in a repeated game. We document four main results. First, there is substantial heterogeneity in the accuracy of our observers, with average accuracy being quite poor. Second, while there is no difference between the most and the least accurate observer in their initial beliefs, there are striking differences in their belief updating rules. The most accurate observers have a well-formulated model of player behavior, are good at best responding and quickly incorporate new information to their beliefs. The worst observers behave in an opposite manner on all three fronts. Third, when the game does not converge, subjects look beyond historical actions to make predictions and place more emphasis on forgone payoffs. Finally, we document that a "collective wisdom" emerges when our data are pooled across subjects and analyzed. Specifically, the accuracy of the group estimates becomes much higher than that of the average observer.
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U2 - 10.1007/s10683-011-9296-2
DO - 10.1007/s10683-011-9296-2
M3 - Article
AN - SCOPUS:84856330197
VL - 15
SP - 176
EP - 203
JO - Experimental Economics
JF - Experimental Economics
SN - 1386-4157
IS - 1
ER -