55 Pages Posted: 23 Dec 2018 Last revised: 13 Jul 2019
Date Written: July 11, 2019
We use a novel experiment to study how players form and update their beliefs about the beliefs of others. The experiment is designed so that players' choices correspond to higher-order expectations about a common state of the world (e.g., economic fundamentals). We find that higher-order expectations reflect a certain degree of sophistication. In particular, they respond to information about how lower-order expectations are formed and are updated more slowly when a player faces uncertainty about others' information. However, we also identify a novel behavioral bias: Higher-order expectations diverge over time, even as more information becomes available. This finding points to a failure of theory of mind, i.e., a failure of subjects to correctly predict the way in which others process information.
Keywords: Higher-order expectations, learning, theory of mind
JEL Classification: C90, D83, D89
Suggested Citation: Suggested Citation