First- and Second-Order Subjective Expectations in Strategic Decision-Making: Experimental Evidence
56 Pages Posted: 22 Mar 2012 Last revised: 18 Feb 2015
Date Written: May 1, 2013
We study first- and second-order subjective expectations (beliefs) in strategic decision making. We propose a method to elicit probabilistically both first- and second-order beliefs and apply the method to a Hide-and-Seek experiment. We study the relationship between choice and beliefs in terms of whether observed choice coincides with the optimal action given elicited beliefs. We study the relationship between first- and second-order beliefs under a coherence criterion. Weak coherence requires that if an event is assigned, according to first-order beliefs, a probability higher/lower/equal to the one assigned to another event, then the same holds according to second-order beliefs. Strong coherence requires the probability assigned according to first- and second-order beliefs to coincide. Evidence of heterogeneity across participants is reported. Verbal comments collected at the end of the experiment shed light on how subjects think and decide in a complex environment that is strategic, dynamic and populated by potentially heterogeneous individuals.
Keywords: decision-making, beliefs, subjective expectations, experiments
JEL Classification: D81, D83, D84, C92
Suggested Citation: Suggested Citation