First- and Second-Order Subjective Expectations in Strategic Decision-Making: Experimental Evidence

56 Pages Posted: 22 Mar 2012 Last revised: 18 Feb 2015

See all articles by Charles F. Manski

Charles F. Manski

Northwestern University - Department of Economics; National Bureau of Economic Research (NBER)

Claudia Neri

University of St. Gallen

Date Written: May 1, 2013

Abstract

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

Manski, Charles F. and Neri, Claudia, First- and Second-Order Subjective Expectations in Strategic Decision-Making: Experimental Evidence (May 1, 2013). Games and Economic Behavior, Vol. 81, 2013, Available at SSRN: https://ssrn.com/abstract=2026877 or http://dx.doi.org/10.2139/ssrn.2026877

Charles F. Manski

Northwestern University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Claudia Neri (Contact Author)

University of St. Gallen ( email )

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Switzerland
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HOME PAGE: http://www.claudianeri.com

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