Can Fear Cause Economic Collapse? Insights from an Experimental Study

27 Pages Posted: 22 Oct 2003  

Antonio Guarino

University College London - Centre for Economic Learning and Social Evolution (ELSE)

Steffen Huck

University College London - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

Thomas D. Jeitschko

Michigan State University - Department of Economics

Date Written: July 15, 2003

Abstract

We study the behavior of experimental subjects who have to make a sequence of risky investment decisions in the presence of network externalities. Subjects follow a simple heuristic investing after positive experiences and reducing their propensity to invest after a failure. This result contrasts with the theoretical findings of Jeitschko and Taylor (2001) in which even agents who have only good experiences eventually stop investing because they are afraid that others with worse experiences will quit. In theory, this "Bayesian fear" can trigger sudden economic collapse even in the most efficient Bayesian equilibrium. In the experiment, subjects are surprisingly fearless of others' experiences, and simply follow their own experiences, thus averting a total collapse.

Keywords: Coordination, Coordination Avalanche, Economic Collapse, Experimental Economics, Network Externalities

JEL Classification: C7, C9, D8, E0, G0

Suggested Citation

Guarino, Antonio and Huck, Steffen and Jeitschko, Thomas D., Can Fear Cause Economic Collapse? Insights from an Experimental Study (July 15, 2003). Available at SSRN: https://ssrn.com/abstract=436841 or http://dx.doi.org/10.2139/ssrn.436841

Antonio Guarino

University College London - Centre for Economic Learning and Social Evolution (ELSE) ( email )

Gower Street
London WC1E 6BT
United Kingdom

HOME PAGE: http://www.homepages.ucl.ac.uk/~uctpagu/

Steffen Huck (Contact Author)

University College London - Department of Economics ( email )

Gower Street
London WC1E 6BT, WC1E 6BT
United Kingdom
+44 207 679 5895 (Phone)
+44 207 916 2774 (Fax)

HOME PAGE: http://www.ucl.ac.uk/~uctpshu/

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Thomas D. Jeitschko

Michigan State University - Department of Economics ( email )

110 Marshall-Adams Hall
East Lansing, MI 48824
United States
517-355-8302 (Phone)
517-432-1068 (Fax)

HOME PAGE: http://www.msu.edu/~jeitschk/

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