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Averting economic collapse and the solipsism bias

Guarino, A; Huck, S; Jeitschko, TD; (2006) Averting economic collapse and the solipsism bias. GAME ECON BEHAV , 57 (2) 264 - 285. 10.1016/j.geb.2005.10.003. Green open access

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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 [Jeitschko, T.D., Taylor, C., 2001. Local discouragement and global collapse: A theory of coordination avalanches. Amer. Econ. Rev. 91 (1), 208-224] in which even agents who have only good experiences eventually stop investing because they account for the fact that others with worse experiences will quit. This can trigger sudden economic collapse-a coordination avalanche-even in the most efficient Bayesian equilibrium. In the experiment, subjects follow their own experiences and disregard the possible bad experiences of others-thus exhibiting behavior that we term "solipsism bias." Solipsism results in sustained investment activity and thus averts complete collapse. (c) 2005 Elsevier Inc. All rights reserved.

Type: Article
Title: Averting economic collapse and the solipsism bias
Open access status: An open access version is available from UCL Discovery
DOI: 10.1016/j.geb.2005.10.003
Keywords: coordination, coordination avalanche, economic collapse, experimental economics, network externalities, solipsism bias, COORDINATION FAILURE, GAMES
UCL classification: UCL
UCL > Provost and Vice Provost Offices
UCL > Provost and Vice Provost Offices > UCL SLASH
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/14595
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