Abstract

http://ssrn.com/abstract=436841
 
 

References (7)



 
 

Citations (2)



 


 



Can Fear Cause Economic Collapse? Insights from an Experimental Study


Antonio Guarino


University College London - Department of Economics and ELSE (Centre for Economic Learning and Social Evolution)

Steffen Huck


University College London - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); Institute for the Study of Labor (IZA)

Thomas D. Jeitschko


Michigan State University - Department of Economics

July 15, 2003


Abstract:     
We study the behavior of experimental subjects who have to make a sequence of risky investment decisions in the presence of network externalities. Subjects follow a simple heuristic investing after positive experiences and reducing their propensity to invest after a failure. This result contrasts with the theoretical findings of Jeitschko and Taylor (2001) in which even agents who have only good experiences eventually stop investing because they are afraid that others with worse experiences will quit. In theory, this "Bayesian fear" can trigger sudden economic collapse even in the most efficient Bayesian equilibrium. In the experiment, subjects are surprisingly fearless of others' experiences, and simply follow their own experiences, thus averting a total collapse.

Number of Pages in PDF File: 27

Keywords: Coordination, Coordination Avalanche, Economic Collapse, Experimental Economics, Network Externalities

JEL Classification: C7, C9, D8, E0, G0

working papers series


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Date posted: October 22, 2003  

Suggested Citation

Guarino, Antonio and Huck, Steffen and Jeitschko, Thomas D., Can Fear Cause Economic Collapse? Insights from an Experimental Study (July 15, 2003). Available at SSRN: http://ssrn.com/abstract=436841 or http://dx.doi.org/10.2139/ssrn.436841

Contact Information

Antonio Guarino
University College London - Department of Economics and ELSE (Centre for Economic Learning and Social Evolution) ( email )
Gower Street
London WC1E 6BT
United Kingdom
HOME PAGE: http://www.homepages.ucl.ac.uk/~uctpagu/
Steffen Huck (Contact Author)
University College London - Department of Economics ( email )
Gower Street
London WC1E 6BT, WC1E 6BT
United Kingdom
+44 207 679 5895 (Phone)
+44 207 916 2774 (Fax)
HOME PAGE: http://www.ucl.ac.uk/~uctpshu/
CESifo (Center for Economic Studies and Ifo Institute)
Poschinger Str. 5
Munich, DE-81679
Germany
Institute for the Study of Labor (IZA)
P.O. Box 7240
Bonn, D-53072
Germany
Thomas D. Jeitschko
Michigan State University - Department of Economics ( email )
110 Marshall-Adams Hall
East Lansing, MI 48824
United States
517-355-8302 (Phone)
517-432-1068 (Fax)
HOME PAGE: http://www.msu.edu/~jeitschk/
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