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Belief formation: an experiment with outside observers

Published online by Cambridge University Press:  14 March 2025

Kyle Hyndman ,
Erkut Y. Özbay ,
Andrew Schotter  and
Wolf Ehrblatt
Kyle Hyndman*
Affiliation:
Department of Economics, Southern Methodist University, 3300 Dyer Street, Suite 301R, Dallas, TX 75275, USA
Erkut Y. Özbay*
Affiliation:
Department of Economics, University of Maryland, 3105 Tydings Hall, College Park, MD 20742, USA
Andrew Schotter*
Affiliation:
Department of Economics and Center for Experimental Social Science, New York University, 19 West 4th Street, 6th Floor, New York, NY 10012, USA
Wolf Ehrblatt*
Affiliation:
Symphony IRI Group, 150 North Clinton Street, Chicago, IL 60661, USA
*
hyndman@smu.edu, url: http://faculty@.smu.edu/hyndman
ozbay@umd.edu
andrew.schotter@nyu.edu
wolly.ehrblatt@gmail.com
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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.

Type
Original Paper
Information
Experimental Economics , Volume 15 , Issue 1 , March 2012 , pp. 176 - 203
Copyright
Copyright © 2011 Economic Science Association

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Footnotes

Electronic supplementary material The online version of this article (doi:https://doi.org/10.1007/s10683-011-9296-2) contains supplementary material, which is available to authorized users.

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