Belief formation: An experiment with outside observers

Kyle Hyndman, Erkut Y. Özbay, Andrew Schotter, Wolf Ehrblatt

    Research output: Contribution to journalArticle

    Abstract

    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.

    Original languageEnglish (US)
    Pages (from-to)176-203
    Number of pages28
    JournalExperimental Economics
    Volume15
    Issue number1
    DOIs
    StatePublished - Mar 1 2012

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    ASJC Scopus subject areas

    • Economics, Econometrics and Finance (miscellaneous)

    Cite this

    Hyndman, K., Özbay, E. Y., Schotter, A., & Ehrblatt, W. (2012). Belief formation: An experiment with outside observers. Experimental Economics, 15(1), 176-203. https://doi.org/10.1007/s10683-011-9296-2