Adam Smith Business School

Professor Guillaume Fréchette, New York University

Beliefs in Repeated Games
Wednesday, 22 February. 3 pm-4:15 pm
Lecture Theatre 206. Main Building

Abstract

This paper uses a laboratory experiment to study beliefs, and their relationship to action and strategy choices infinitely and indefinitely repeated prisoners’ dilemma games. We find subjects’ beliefs about the other player’s action are generally accurate despite some small systematic deviations corresponding to early pessimism in the indefinitely repeated game and late optimism in the finitely repeated game. The data reveal a close link between beliefs and actions that differs between the two games. In particular, the same history of play is associated with different beliefs and the same beliefs with different action choices in each game. Moreover, we find beliefs anticipate the evolution of behaviour within a super game, changing in response to the history of play (in both games) and the number of rounds played (in the finitely repeated game). We then use the subjects’ beliefs over actions in each round to identify their beliefs over super game strategies played by the other player. We find these beliefs correctly capture the different classes of strategies used in each game. Importantly, subjects using different strategies have different beliefs, and for the most part, strategies are subjectively rational given beliefs. The results also suggest subjects tend to underestimate the likelihood that others use less cooperative strategies. In the finitely repeated game, this helps explain the slow unravelling of cooperation. In the indefinitely repeated game, the persistence of heterogeneity in beliefs underpins the difficulty of resolving equilibrium selection.

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First published: 23 January 2023