Wharton on Making Decisions by Stephen J. Hoch

Author:Stephen J. Hoch [Hoch, Stephen J.]
Language: eng
Format: epub
Published: 2008-05-28T05:14:00+00:00

Figure 9.1 (Continued)

What happens when sophisticated players enter these games? In any given game, some players are very sophisticated and others are not. The sophisticated players understand the learning process. Suppose the average in one period is 30, so that choosing 20 would have been a winning number. In the next period, most players tend to choose 20, but sophisticated players guess others will choose 20 and choose 2/3 of 20, around 13, leapfrogging ahead. (In the Internet economy, the trick is not to be one step ahead of the competition, but always planning for the next step after that one.) The more sophisticated the players, the more rapidly the group will converge toward the equilibrium point of zero. But what is important is that the sophisticated players will lower their number if they believe other players are unsophisticated. Remember, they are trying to anticipate how others will act. For example, if these sophisticated players could actually use the EWA model to predict every player's choice in every period, they would know how to make better choices and would win more often.

Figure 9.2a shows the distribution of actual choices by subjects who played the game 10 times. The axis on the front left shows intervals of numbers players might pick. The right axis is the period of the game (from 1 to 10). The proportion of players choosing lower numbers grows and grows across the 10 repetitions-that is, the bars representing low-number choices grow taller and taller-as they learn. Figure 9.2b shows statistical predictions of the EWA theory (that is, what players are predicted to do). The two graphs look very similar, which means that the theory is doing a good job of predicting how players will actually learn.

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