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Loss-Avoidance and Forward Induction in Experimental Coordination Games

Cachon, Gérard P. and Camerer, Colin F. (1996) Loss-Avoidance and Forward Induction in Experimental Coordination Games. Quarterly Journal of Economics, 111 (1). pp. 165-194. ISSN 0033-5533.

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We report experiments on how players select among multiple Pareto-ranked equilibria in a coordination game. Subjects initially choose inefficient equilibria. Charging a fee to play (which makes initial equilibria money-losing) creates coordination on better equilibria. When fees are optional, improved coordination is consistent with forward induction. But coordination improves even when subjects must pay the fee (forward induction does not apply). Subjects appear to use a "loss-avoidance" selection principle: they expect others to avoid strategies that always result in losses. Loss-avoidance implies that "mental accounting" of outcomes can affect choices in games.

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Additional Information:© 1996 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
Record Number:CaltechAUTHORS:20110211-075501716
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Official Citation:Cachon, G. P. and C. F. Camerer (1996). "Loss-Avoidance and Forward Induction in Experimental Coordination Games." The Quarterly Journal of Economics 111(1): 165-194.
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:22123
Deposited By: Tony Diaz
Deposited On:14 Feb 2011 19:33
Last Modified:26 Dec 2012 12:55

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