The Times They are A-Changin'; But are we Changin' with 'em? Experiments on Dynamic Adverse Selection

Alistair Wilson

No 6250, Working Paper from Department of Economics, University of Pittsburgh

Abstract: Across a variety of contexts decision-makers exhibit a robust failure to understandthe interaction of private information and strategy, with one prominent example being the winner’scurse. Such failures have generally been observed in static settings, where participants fail to thinkthrough a future hypothetical. We use a laboratory experiment to examine a common-value matchingenvironment where strategic thinking is entirely backward looking, and adverse selection is adynamic, non-stationary process. Our results indicate the majority of subjects in our environmentuse a sub-optimal stationary response—even after extended experience and feedback. In terms oflearning, even stationary subjects learn to adjust their behavior in response to the adverse selection,though adjusting their unconditional response. In contrast the minority using non-stationaryresponses do so very quickly, reflecting an introspective rather than learned solution to the problem.

Date: 2017-01
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