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Free keywords:
regret aversion, coordination games, information
JEL:
C72 - Noncooperative Games
JEL:
C92 - Laboratory, Group Behavior
JEL:
D81 - Criteria for Decision-Making under Risk and Uncertainty
JEL:
D15 - Intertemporal Household Choice; Life Cycle Models and Saving
Abstract:
Existing models of regret aversion assume that individuals can make an ex-post comparison between their choice and a foregone alternative. Yet in many situations such a comparison can be made only if someone else chose the alternative option. We develop a model where regret-averse agents must decide between the status quo and a new risky option that outperforms the status quo in expectation, and learn the outcome of the risky option, if unchosen, with a probability that depends on the choices of others. This turns what was previously a series of single-person decision problems into a coordination game. Most notably, regret can facilitate coordination on the status quo { an action that would not be observed if the agents were acting in isolation or had standard preferences. We experimentally test the model and find that regret-averse agents behave as predicted by our theory.
