Ewa Learning in Bilateral Call Markets

This chapter extends the EWA learning model to bilateral call market games (also known as the "sealed-bid mechanism" in two-person bargaining). In these games, a buyer and seller independently draw private values from commonly-known distributions and submit bids. If the buyer's bid is above the seller's, they trade at the midpoint of the two bids; otherwise they don't trade. We apply EWA by assuming that players have value-dependent bidding strategies, and they partially generalize experience from one value/cost condition to another in response to the incentives from nonlinear optimal bid functions. The same learning model can be applied to other market institutions where subjects economize on learning by taking into consideration similarity between past experience and a new environment while still recognizing the difference in market incentives between them. The chapter also presents a new application of EWA to a "continental divide" coordination game, and reviews 32 earlier studies comparing EWA, reinforcement, and belief learning. The application shows the advantages of a generalized adaptive model of behavior that includes elements of reinforcement, belief-based and direction learning as special cases at some cost of complexity for the benefit of generality and psychological appeal. It is a good foundation to build upon to extend our understanding of adaptive behavior in more general games and market institutions. In future work, we should investigate the similarity parameters, ψ and ω, to better characterize their magnitude and significance in different market institutions.