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Trading Participation Rights to the “Red Hat Puzzle”. An Experiment

Choo, Lawrence C.Y (2014): Trading Participation Rights to the “Red Hat Puzzle”. An Experiment.

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Abstract

This paper investigates the conventional wisdom that markets should allocate the rights for performing decisional tasks to those players who might be best suited to perform the task. We embed the decisional tasks in a stylised setting of a game, motivated by Littlewood (1953) Red Hat Puzzle, where the optimal choices in the game require players to employ logical and epistemological reasoning. We present a treatment where players are permitted to trade their participation rights to the game. The payoffs are furthermore calibrated such that those players who know the optimal choices in the game should value the participation rights strictly more than those who do not. However, aggregated performances in this treatment were found to be significantly lower than the control treatments where players were not permitted to trade their participation rights, providing little support for the conventional wisdom. We show that this finding could be attributed to price “bubbles” in the markets for participations rights.

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