Hindsight, Foresight, and Insight: An Experimental Study of a Small-Market Investment Game with Common and Private Values

We experimentally test an endogenous-timing investment model in which subjects privately observe their cost of investing and a signal correlated with the common investment return. Subjects overinvest, relative to Nash. We separately consider whether subjects draw inferences, in hindsight, and use foresight to delay profitable investment and learn from market activity. In contrast to Nash, cursed equilibrium, and level-k predictions, behavior hardly changes across our experimental treatments. Maximum likelihood estimates are inconsistent with belief-based theories. We offer an explanation in terms of boundedly rational rules of thumb, based on insights about the game, which provides a better fit than QRE. ∗Asen Ivanov, Department of Economics, Virginia Commonwealth University, 301 W. Main Street, Snead Hall B3149, Richmond, VA 23284; [email protected]. Dan Levin: Department of Economics, The Ohio State University, 1945 N High Street, Arps Hall 410, Columbus, OH 43210; [email protected]. James Peck: Department of Economics, The Ohio State University, 1945 N High Street, Arps Hall 410, Columbus, OH 43210; [email protected]. This material is based upon work supported by the NSF under Grant No. SES-0417352. Any opinions, findings and conclusions or recommendations expressed are those of the authors and do not necessarily reflect the views of the NSF. We thank the John Glenn Institute at Ohio State for their support. We thank three anonymous referees for their suggestions. We thank Steve Cosslett, David Harless, P. J. Healy, and Oleg Korenok for helpful conversations.