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Loss-Avoidance and Forward Induction in Experimental Coordination Games

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Author Info
Cachon, Gerard P
Camerer, Colin F

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Abstract

The authors report experiments on how players select among multiple Pareto-ranked equilibria in a coordination game. Subjects initially choose inefficient equilibria. Charging a fee to play (which makes initial equilibria money-losing) creates coordination on better equilibria. When fees are optional, improved coordination is consistent with forward induction but coordination improves even when subjects must pay the fee (forward induction does not apply). Subjects appear to use a 'loss-avoidance' selection principle: they expect others to avoid strategies that always result in losses. Loss-avoidance implies that 'mental accounting' of outcomes can affect choices in games. Copyright 1996, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Publisher Info
Article provided by MIT Press in its journal Quarterly Journal of Economics.

Volume (Year): 111 (1996)
Issue (Month): 1 (February)
Pages: 165-94
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Handle: RePEc:tpr:qjecon:v:111:y:1996:i:1:p:165-94

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  1. Miguel Costa-Gomes & Vincent P. Crawford & Bruno Broseta, 2000. "Cognition and Behavior in Normal-Form Games: An Experimental Study," University of California at San Diego, Economics Working Paper Series 2000-02r, Department of Economics, UC San Diego. [Downloadable!]
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  2. Offerman, T. & Potters, J., 2000. "Does auctioning of entry licenses affect consumer prices? : an experimental study," Discussion Paper 53, Tilburg University, Center for Economic Research. [Downloadable!]
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  3. Kofi Nti, 2000. "Potential competition and coordination in a market-entry game," Journal of Economics, Springer, vol. 71(2), pages 149-165, June. [Downloadable!] (restricted)
  4. Bohnet, Iris & Cooter, Robert, 2003. "Expressive Law: Framing or Equilibrium Selection?," Working Paper Series rwp03-046, Harvard University, John F. Kennedy School of Government. [Downloadable!]
  5. Claudia Keser & Marc Willinger, 2002. "Theories Of Behavior In Principal-Agent Relationships With Hidden Action," Working Papers of BETA 2002-07, Bureau d'Economie Théorique et Appliquée, ULP, Strasbourg. [Downloadable!]
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  6. Juin-Kuan Chong & Colin F. Camerer & Teck H. Ho, 2005. "A learning-based model of repeated games with incomplete information," Levine's Bibliography 666156000000000537, UCLA Department of Economics. [Downloadable!]
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  7. Susanne Büchner & Werner Güth & Luis M. Miller, 2005. "Conventions for Selecting Among Conventions - An Evolutionary and Experimental Analysis," Papers on Strategic Interaction 2005-21, Max Planck Institute of Economics, Strategic Interaction Group. [Downloadable!]
  8. Iris Bohnet & Robert Cooter, 2001. "Expressive Law: Framing or Equilibrium Selection?," Berkeley Olin Program in Law & Economics, Working Paper Series 1058, Berkeley Olin Program in Law & Economics. [Downloadable!]
  9. Claudia Keser & Claude Montmarquette, 2004. "Voluntary Teaming and Effort," CIRANO Working Papers 2004s-49, CIRANO. [Downloadable!]
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  10. Giovanna Devetag & Andreas Ortmann, 2006. "When and Why? A Critical Survey on Coordination Failure in the Laboratory," CEEL Working Papers 0605, Computable and Experimental Economics Laboratory, Department of Economics, University of Trento, Italia. [Downloadable!]
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  11. De Figueiredo, John M. & De Figueiredo, Rui J. P. Jr., 2002. "Managerial Decision-Making in Non-Market Environments: A Survey Experiment," Working papers 4246-02, Massachusetts Institute of Technology (MIT), Sloan School of Management. [Downloadable!]
  12. Keser, Claudia & Vogt, Bodo, 0000. "Why do experimental subjects choose an equilibrium which is neither risk nor payoff dominant," Sonderforschungsbereich 504 Publications 00-40, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim. [Downloadable!]
  13. Nadine Chlaß & Werner Güth & Christoph Vanberg, 2007. "Social Learning of Efficiency Enhancing Trade With(out) Market Entry Costs - An experimental study," Papers on Strategic Interaction 2006-36, Max Planck Institute of Economics, Strategic Interaction Group. [Downloadable!]
  14. Thomas Riechmann, 2005. "Dynamic Behavior in Minimum Effort Coordination Games - Some Theory of Group Size and Inter-Group Competition as Coordination Devices," Game Theory and Information 0503010, EconWPA. [Downloadable!]
  15. Camerer, Colin F, 1997. "Progress in Behavioral Game Theory," Journal of Economic Perspectives, American Economic Association, vol. 11(4), pages 167-88, Fall. [Downloadable!] (restricted)
  16. Rachel Croson & Enrique Fatas & Tibor Neugebauer, 2006. "An Experimental Analysis Of Conditional Cooperation," Working Papers. Serie AD 2006-24, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie). [Downloadable!]
  17. Dimitri Dubois & Marc Willinger & Phu Nguyen Van, 2008. "Optimization incentive and relative riskiness in experimental coordination games," Working Papers 08-19, LAMETA, Universtiy of Montpellier, revised Nov 2008. [Downloadable!]
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  18. Enrique Fatas & Tibor Neugebauer & Bruno Broseta, 2001. "Asset Markets And Equilibrium Selection In Public Goods Games With Provision Points: An Experimental Study," Working Papers. Serie AD 2001-29, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie). [Downloadable!]
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  19. Johnson, Eric J. & Camerer, Colin & Sen, Sankar & Rymon, Talia, 1998. "Detecting Failures of Backward Induction: Monitoring Information Search in Sequential Bargaining," Working Papers 1040, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]
  20. Giovanna Devetag & Andreas Ortmann, 2007. "Classic coordination failures revisited: the effects of deviation costs and loss avoidance," CEEL Working Papers 0703, Computable and Experimental Economics Laboratory, Department of Economics, University of Trento, Italia. [Downloadable!]
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