Magical thinking in an incomplete information bargaining game: an experimental study

Abstract

This thesis investigates the effect of magical thinking on individuals’ decision-making processes, with a specific focus on incomplete information ultimatum bargaining games. Hiding behind the small pie is a robust finding of this literature where the proposers use an information advantage for their personal gain. Using a simple ultimatum bargaining setup, we examine the impact of the timing of uncertainty resolution on the proposers’ offers and the frequency of hiding behind the small pie behavior. We employ a between-subject design with two treatments: BEF(ore) and AFT(er), varying the timing of randomization that determines the pie size without any variation in the information set of proposers across treatments. The probit regression analysis results suggest that treatment variation impacts the proposers’ tendency to hide behind the small pie, in line with our hypothesis. To the best of our knowledge, this is the first study investigating the effect of magical thinking in a sequential bargaining game.