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Loss Avoidance and Forward Induction in Experimental Coordination Games

Cachon, Gérard P. and Camerer, Colin F. (1995) Loss Avoidance and Forward Induction in Experimental Coordination Games. Social Science Working Paper, 937. California Institute of Technology , Pasadena, CA. (Unpublished)

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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 out- comes can affect choices in games.

Item Type:Report or Paper (Working Paper)
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URLURL TypeDescription ItemPublished Version
Camerer, Colin F.0000-0003-4049-1871
Additional Information:Abstract obtained from published version of this article. Published as Cachon, Gerard P., and Colin F. Camerer. "Loss-avoidance and forward induction in experimental coordination games." The Quarterly Journal of Economics 111.1 (1996): 165-194.
Group:Social Science Working Papers
Subject Keywords:Fees, Statistical median, Games, Private costs, Cost of entry, Coordination games, Economic costs, Inductive reasoning, Coordination failures, Auctions
Series Name:Social Science Working Paper
Issue or Number:937
Record Number:CaltechAUTHORS:20170817-160321150
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Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:80585
Deposited By: Jacquelyn Bussone
Deposited On:18 Aug 2017 18:22
Last Modified:03 Oct 2019 18:32

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