Testing Psychological Forward Induction and the Updating of Beliefs in the Lost Wallet Game

22 Pages Posted: 4 May 2015 Last revised: 10 Mar 2016

See all articles by Daniel Woods

Daniel Woods

Purdue University

Maroš Servátka

Macquarie Graduate School of Management - MGSM Experimental Economics Laboratory

Date Written: March 9, 2016

Abstract

This paper studies psychological forward induction and the updating of beliefs in the lost wallet game (Dufwenberg & Gneezy, 2000), which is required to derive a prediction for guilt averse agents. Our experiment tests whether the second movers psychologically induct forward and update their beliefs after observing their paired first movers’ decision by eliciting beliefs with different second mover knowledge of first mover decision, depending on treatment. We find that second movers do update their beliefs conditional on receiving information on the first mover’s action, supporting psychological forward induction.

Keywords: beliefs, experiment, guilt aversion, lost wallet game, psychological forward induction, updating

JEL Classification: C70, C91

Suggested Citation

Woods, Daniel and Servátka, Maroš, Testing Psychological Forward Induction and the Updating of Beliefs in the Lost Wallet Game (March 9, 2016). Available at SSRN: https://ssrn.com/abstract=2601886 or http://dx.doi.org/10.2139/ssrn.2601886

Daniel Woods

Purdue University ( email )

West Lafayette, IN 47907-1310
United States

Maroš Servátka (Contact Author)

Macquarie Graduate School of Management - MGSM Experimental Economics Laboratory ( email )

Sydney
Australia

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