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  • 1
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    München: Sonderforschungsbereich/Transregio 15 Governance and the Efficiency of Economic Systems
    Publication Date: 2014-03-22
    Description: This paper presents a strategic model of risk-taking behavior in contests. Formally, we analyze an n-player winner-take-all contest in which each player decides when to stop a privately observed Brownian Motion with drift. A player whose process reaches zero has to stop. The player with the highest stopping point wins. Contrary to the explicit cost for a higher stopping time in a war of attrition, here, higher stopping times are riskier, because players can go bankrupt. We derive a closed-form solution of the unique Nash equilibrium outcome of the game. In equilibrium, the trade-off between risk and reward causes a non-monotonicity: highest expected losses occur if the process decreases only slightly in expectation.
    Keywords: C72 ; C73 ; D81 ; ddc:330 ; Discontinuous games ; Contests ; Relative performance pay ; Risktaking behavior ; Entscheidung bei Risiko ; Glücksspiel ; Nichtkooperatives Spiel ; Test
    Language: English
    Type: doc-type:workingPaper
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  • 2
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    München: Sonderforschungsbereich/Transregio 15 Governance and the Efficiency of Economic Systems
    Publication Date: 2014-03-22
    Description: This paper introduces a contest model in which each player decides when to stop a privately observed Brownian motion with drift and incurs costs depending on his stopping time. The player who stops his process at the highest value wins a prize. Applications of the model include procurement contests and competitions for grants. We prove existence and uniqueness of the Nash equilibrium outcome, even if players have to choose bounded stopping times. We derive the equilibrium distribution in closed form. If the noise vanishes, the equilibrium outcome converges to - and thus selects - the symmetric equilibrium outcome of an all-pay auction. For two players and constant costs, each player's profits increase if costs for both players increase, variance increases, or drift decreases. Intuitively, patience becomes a more important factor for contest success, which reduces informational rents.
    Keywords: ddc:330 ; Contests ; all-pay contests ; silent timing games ; Entscheidung bei Risiko ; Glücksspiel ; Nichtkooperatives Spiel ; Zeitökonomie ; Theorie
    Language: English
    Type: doc-type:workingPaper
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  • 3
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    Hoboken, NJ: Wiley
    Publication Date: 2019-05-30
    Description: We study learning and information acquisition by a Bayesian agent whose prior belief is misspecified in the sense that it assigns probability 0 to the true state of the world. At each instant, the agent takes an action and observes the corresponding payoff, which is the sum of a fixed but unknown function of the action and an additive error term. We provide a complete characterization of asymptotic actions and beliefs when the agent's subjective state space is a doubleton. A simple example with three actions shows that in a misspecified environment a myopic agent's beliefs converge while a sufficiently patient agent's beliefs do not. This illustrates a novel interaction between misspecification and the agent's subjective discount rate.
    Keywords: D83 ; D90 ; ddc:330 ; Active learning ; learning in games ; misspecified models
    Language: English
    Type: doc-type:article
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  • 4
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    Berlin: Deutsches Institut für Wirtschaftsforschung (DIW)
    Publication Date: 2016-06-22
    Description: Many economic situations involve the timing of irreversible decisions. E.g. People decide when to sell a stock or stop searching for a better price. We analyze the behavior of a decision maker who evaluates his choice relative to the ex-post optimal choice in an optimal stopping task. We derive the optimal strategy under such regret preferences, and show how it is different from that of an expected utility maximizer. We also show that if the decision maker never commits mistakes the behavior resulting from this strategy is observationally equivalent to that of an expected utility maximizer. We then test our theoretical predictions in the laboratory. The results from a structural discrete choice model we fit to our data provide strong evidence that many people's stopping behavior is largely determined by the anticipation of and aversion to regret.
    Keywords: D03 ; C91 ; ddc:330 ; Optimal stopping ; Dynamic behavior ; Regret
    Language: English
    Type: doc-type:workingPaper
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  • 5
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    München: Sonderforschungsbereich/Transregio 15 Governance and the Efficiency of Economic Systems
    Publication Date: 2014-03-22
    Description: We consider two players facing identical discrete-time bandit problems with a safe and a risky arm. In any period, the risky arm yields either a success or a failure, and the first success reveals the risky arm to dominate the safe one. When payoffs are public information, the ensuing free-rider problem is so severe that the equilibrium number of experiments is at most one plus the number of experiments that a single agent would perform. When payoffs are private information and players can communicate via cheap talk, the socially optimal symmetric experimentation profile can be supported as a perfect Bayesian equilibrium for sufficiently optimistic prior beliefs. These results generalize to more than two players whenever the success probability per period is not too high. In particular, this is the case when successes occur at the jump times of a Poisson process and the period length is sufficiently small.
    Keywords: C73 ; D83 ; ddc:330 ; Strategic Experimentation ; Bayesian Learning ; Cheap Talk ; Two-Armed Bandit ; Information Externality ; Entscheidung bei Risiko ; Informationsverhalten ; Spieltheorie ; Theorie
    Language: English
    Type: doc-type:workingPaper
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