Identification of Biased Beliefs in Games of Incomplete Information Using Experimental Data

Abstract

This paper studies the identification of players'; preferences and beliefs in empirical applications of discrete choice games using experimental data. The experiment comprises a set of games with similar features (e.g., two-player coordination games) where each game has different values for the players'; monetary payoffs. Each game can be interpreted as an experimental treatment group. The researcher assigns randomly subjects to play these games and observes the outcome of the game as described by the vector of players' actions. Data from this experiment can be described in terms of the empirical distribution of players' actions conditional on the treatment group. The researcher is interested in the nonparametric identification of players' preferences (utility function of money) and players' beliefs about the expected behavior of other players, without imposing restrictions such as unbiased or rational beliefs or a particular functional form for the utility of money. We show that the hypothesis of unbiased/rational beliefs is testable and propose a test of this null hypothesis. We apply our method to two sets of experiments conducted by Goeree and Holt (2001) and Heinemann, Nagel and Ockenfels (2009). Our empirical results suggest that in the matching pennies game, a player is able to correctly predict other player's behavior. In the public good coordination game, our test can reject the null hypothesis of unbiased beliefs when the payoff of the non-cooperative action is relatively low.