Individuals often interact with each other through observation -- they observe the choices of other people who possess private information. In such social interactions, it is typically assumed that decision makers have rationalexpectations, therefore they can infer what other decision makers know via observation of their choices . In this study, I assess the validity of the rational expectations assumption in a social interaction experiment. I use a simple and transparent experimental setting to show that decision makers often fail to exhibit rational expectations in social interactions and this behavior is independent of commonly documented errors in statistical reasoning: subjects exhibit a higher level of irrationality in the presence than in the absence of social interaction, even when they receive informationally equivalent signals across the two conditions. A series of treatments aimed at identifying mechanisms suggests that  the behavior of other people are often "ambiguous" to a decision maker who observes their choices . So, the decision maker behaves as if she has limited ability to infer the relationship between what other people choose and what they know .
Individuals often interact with each other through observation -- they observe the choices of other people who possess private information. In empirical models of social interactions, it is typically assumed that decision makers are Bayesian rational, therefore their beliefs are identified by the empirical distribution of other agents' decisions . In this study, I assess the validity of the rational expectations assumption in a social interaction experiment. I use a simple and transparent experimental setting to show that decision makers often fail to exhibit rational expectations in social interactions and this behavior is independent of commonly documented errors in statistical reasoning: subjects exhibit a higher level of irrationality in the presence than in the absence of social interaction, even when they receive informationally equivalent signals across the two conditions. A series of treatments aimed at identifying mechanisms suggests that a decision maker is often uncertain about the behavior of other people . So, she might have difficulty in inferring the information contained in others' choices. A general decision-making process is then non-parametrically estimated and sheds light on the identification of three types of error in subjects' behavior .
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such
empirical models of
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have rationalexpectations, therefore they can infer what other decision makers know via observation of their choices
are Bayesian rational, therefore their beliefs are identified by the empirical distribution of other agents' decisions
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a decision maker is often uncertain about
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are often "ambiguous" to a decision maker who observes their choices
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the decision maker behaves as if she has limited ability to infer the relationship between what other people choose and what they know
she might have difficulty in inferring the information contained in others' choices. A general decision-making process is then non-parametrically estimated and sheds light on the identification of three types of error in subjects' behavior