Adaptive learning under strategic and structural uncertainty: the case of auction games

Abstract

In games of incomplete information individual players make decisions facing a combination of structural uncertainty about the underlying parameters of the environment, and strategic uncertainty about the actions undertaken by their partners. How well are human actors able to cope with these uncertainties, and what models best describe their learning in such environments? We use a double auction task with different competitive and informational environments to characterize learning abilities of the single human participants (buyers) in a range of adaptive learning models covering reinforcement learning, directional learning and belief learning. Results show that real behaviour is best described using simple models of directional learning type with minimal knowledge assumptions about information efficiency of prices. This behavior is consistent with bounded rationality and risk aversion: human subjects try to maximize their chance for transaction, and do so using the simplest learning rule.