489/2020 David Gill and Yaroslav Rosokha

The indefinitely repeated prisoner’s dilemma (IRPD) captures the trade-off between the short-term payoff from exploiting economic partners and the long-term gain from building successful relationships. We aim to understand more about how people form and use beliefs about others in the IRPD. To do so, we elicit beliefs about the supergame strategies chosen by others. We find that initial beliefs match behavior quite well and that most subjects choose strategies that perform well given their beliefs. Motivated by belief clustering, we use beliefs to estimate a level-k model of boundedly rational thinking. We analyze how beliefs and behavior evolve with experience: beliefs become more accurate over time, and we use beliefs to provide new evidence about the mechanism that underlies learning from experience. Finally, we find that a survey measure of trust predicts cooperative behavior and optimism about others’ cooperation, which helps to explain how trust underpins successful economic exchanges.

Behavioural Economics and Wellbeing