The "naive model" of behavior in takeover games and common value auctions explains the "winner's curse" observed in those games by positing that subjects tend to ignore the fact that the acceptance of a bid is an informative event. Such subjects replace appropriate conditional expectations by inappropriate unconditional expectations. In other work on Coasian bargaining games under incomplete information, however, we have noticed that there is virtually no evidence that subject behavior is described by the "naive model"--even though this environment is also one characterized by adverse selection problems (like takeover games and common value auctions). We explore the hypothesis that may or may not adopt the "naive simplification," and that this choice is mediated by (a) the complexity of the uncertainties faced by subjects in a game of incomplete information, and (b) the "plausibility" of the naive simplification. The new experiments introduce novel discrete versions of the well-know takeover game and include controls for risk attitudes.

Co-author Glen Archibald