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 2012

    Fingerprint

    Observer
    Experiment
    Prediction
    Wisdom
    Repeated games

    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

    Belief formation : An experiment with outside observers. / Hyndman, Kyle; Özbay, Erkut Y.; Schotter, Andrew; Ehrblatt, Wolf.

    In: Experimental Economics, Vol. 15, No. 1, 03.2012, p. 176-203.

    Research output: Contribution to journalArticle

    Hyndman, K, Özbay, EY, Schotter, A & Ehrblatt, W 2012, 'Belief formation: An experiment with outside observers', Experimental Economics, vol. 15, no. 1, pp. 176-203. https://doi.org/10.1007/s10683-011-9296-2
    Hyndman, Kyle ; Özbay, Erkut Y. ; Schotter, Andrew ; Ehrblatt, Wolf. / Belief formation : An experiment with outside observers. In: Experimental Economics. 2012 ; Vol. 15, No. 1. pp. 176-203.
    @article{2dbc7deebeff464ebe40fa5483b4d3b0,
    title = "Belief formation: An experiment with outside observers",
    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.",
    author = "Kyle Hyndman and {\"O}zbay, {Erkut Y.} and Andrew Schotter and Wolf Ehrblatt",
    year = "2012",
    month = "3",
    doi = "10.1007/s10683-011-9296-2",
    language = "English (US)",
    volume = "15",
    pages = "176--203",
    journal = "Experimental Economics",
    issn = "1386-4157",
    publisher = "Springer New York",
    number = "1",

    }

    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.

    UR - http://www.scopus.com/inward/record.url?scp=84856330197&partnerID=8YFLogxK

    UR - http://www.scopus.com/inward/citedby.url?scp=84856330197&partnerID=8YFLogxK

    U2 - 10.1007/s10683-011-9296-2

    DO - 10.1007/s10683-011-9296-2

    M3 - Article

    VL - 15

    SP - 176

    EP - 203

    JO - Experimental Economics

    JF - Experimental Economics

    SN - 1386-4157

    IS - 1

    ER -