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Loss-Avoidance and Forward Induction in Experimental Coordination Games

Gérard P. Cachon and Colin F. Camerer
The Quarterly Journal of Economics
Vol. 111, No. 1 (Feb., 1996), pp. 165-194
Published by: Oxford University Press
Stable URL: http://www.jstor.org/stable/2946661
Page Count: 30
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Loss-Avoidance and Forward Induction in Experimental Coordination Games
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Abstract

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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