Paper #804

Title:

Measuring strategic uncertainty in coordination games

Authors:

Frank Heinemann, Rosemarie Nagel and Peter Ockenfels

Date:

December 2004

Abstract:

This paper explores three aspects of strategic uncertainty: its relation to risk, predictability of behavior and subjective beliefs of players. In a laboratory experiment we measure subjects’ certainty equivalents for three coordination games and one lottery. Behavior in coordination games is related to risk aversion, experience seeking, and age. From the distribution of certainty equivalents we estimate probabilities for successful coordination in a wide range of games. For many games, success of coordination is predictable with a reasonable error rate. The best response to observed behavior is close to the global-game solution. Comparing choices in coordination games with revealed risk aversion, we estimate subjective probabilities for successful coordination. In games with a low coordination requirement, most subjects underestimate the probability of success. In games with a high coordination requirement, most subjects overestimate this probability. Estimating probabilistic decision models, we show that the quality of predictions can be improved when individual characteristics are taken into account. Subjects’ behavior is consistent with probabilistic beliefs about the aggregate outcome, but inconsistent with probabilistic beliefs about individual behavior.

Keywords:

Belief Formation, Coordination Games, Global Game, Lotteries, Risk Aversion, Strategic Uncertainty, Leex

JEL codes:

C72, C91, D81, D84

Area of Research:

Behavioral and Experimental Economics

Download the paper in PDF format