Strategic Uncertainty in the Guessing Game and the Role and Effects of a Public Common Noise Player

Abstract

Guessing games are often used in the behavioral economics literature to investigate the rationality of economic agents. In this paper, the author uses a typical guessing game to examine not only the rationality of the test subjects but also the degree of their strategic uncertainty in playing the guessing game. A typically negative relationship was found between the frequency and the degree of strategic uncertainty, measured by proxy using the test subjects' guesses as to the standard deviation of all test subjects' answers regarding selection of a number from a specified interval. The role and effects of a public common noise player in the guessing game were investigated, which showed that the existence of such a player, even when he/she is not rational, can decrease the variance of the answered values and the degree of strategic uncertainty. These findings imply that the existence of a public common noisy player who is not necessarily rational can provide an anchoring focal point in the guessing game under uncertainty and that this player can be an influential coordinator. This implication would be useful in explaining possible bubbles or booms/bursts, collective short sales such as currency attacks in markets, or other real-world economic and business anomalies.