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
Date Written: March 9, 2016
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: Suggested Citation