Subjective beliefs are crucial for economic inference, yet behavior can challenge the elicitation. We propose that belief elicitation should be incentive compatible not only theoretically but also in a de facto behavioral sense. To demonstrate, we show that the binarized scoring rule, a state-of-the-art elicitation, violates two weak conditions for behavioral incentive compatibility: (i) within the elicitation, information on the incentives increases deviations from truthful reporting; and (ii) in a pure choice over the set of incentives, most deviate from the theorized maximizer. Moreover, we document that deviations are systematic and center-biased, and that the elicited beliefs substantially distort inference.

We study ethical concerns of consumers in experimental markets. Consumers have monopsony power, firms set prices and wages, and workers are passive recipients of a wage payment who can be protected by a minimum wage regulation. We find that the majority of consumers occasionally deviate from their self-interest and that markets with such consumers exhibit substantially higher wages. Consumers implement fair allocations using two distinct strategies: they split their demand between firms, or they buy all units from the firm with the higher price and higher wage. The two strategies can be captured by maximin preferences and indirect reciprocity in Charness and Rabin's (2002) reciprocal fairness model. A minimum wage raises average wages although it weakens consumers' fairness concerns.

This study investigates a source of comparative overconfidence, or overplacement, which occurs when people overestimate themselves relative to others. We present a simple application of information projection (Madarász, 2012) to show that hindsight bias can lead to overplacement and excessive willingness to compete. We run an experiment in which subjects choose between a competitive tournament and piece-rate compensation after observing some of their competitors' past performance. We exogenously manipulate whether subjects have ex post information about their competitors' past tasks (hindsight) or not (no hindsight). We find that hindsight bias generates overplacement and increases subjects' valuation of tournament participation by 19%. In line with theory, the additional tournament entry in the hindsight setting is driven by low-performing participants who should not have entered the tournament.

We study how subjects in an experiment use different forms of public information about their opponents' past behavior. In the absence of public information, subjects appear to use rather detailed statistics summarizing their private experiences. If they have additional public information, they make use of this information even if it is less precise than their own private statistics – except for very high stakes. Making public information more precise has two consequences: It is also used when the stakes are very high and it reduces the number of subjects who ignore any information – public and private. That is, precise public information crowds in the use of own information. Finally, our results shed some light on unraveling in centipede games.

With the help of a simple model, we show that the hindsight bias can lead to inefficient delegation decisions. This prediction is tested experimentally. In an online experiment that was conducted during the FIFA World Cup 2010, participants were asked to predict a number of outcomes of the ongoing World Cup and had to recall their assessments after the outcomes had been realized. Their answers were used to construct individual measures of the hindsight bias. The participants also had to make choices in a delegation game. Our data confirm that hindsight-biased subjects more frequently fail to delegate optimally than subjects whom we have classified as not hindsight biased.

We study beliefs and actions in a repeated normal-form game. Using a level-k model of limited strategic reasoning and allowing for other-regarding preferences, we classify action and belief choices with regard to their strategic sophistication and study their development over time. In addition to a baseline treatment with common knowledge of the game structure, feedback about actions in the previous period and random matching, we run treatments (i) with fixed matching, (ii) without information about the other player’s payoffs, and (iii) without feedback about previous play. In all treatments with feedback, we observe more strategic play (increasing by 15 percent) and higher-level beliefs (increasing by 18 percent) over time. Without feedback, neither beliefs nor actions reach significantly higher levels of reasoning (with increases of 2 percentage points for actions and 6 percentage points for beliefs). The levels of reasoning reflected in actions and beliefs are highly consistent, but less so for types with lower levels of reasoning.

We study the structure of biased social cognition which involves not simply one's belief about the beliefs of others, but also one's belief about their beliefs of one's own belief. We find that while people naively project their information onto differentially-informed others, they also anticipate differentially-informed others' projection onto them. In a principal-agent setting, we directly test the tight one-to-one structural relationship between the partial extent to which the typical person projects her information onto others, ρ, and the extent to which she anticipates but partially underestimates the projection of others onto her, ρ². The data is remarkably consistent with the parsimonious link implied by the model of projection equilibrium. Furthermore, the majority of subjects both think that others are partially biased, but they also partially underestimate the extent of their bias. The result lends support to the notion of biased social cognition arising as a combination of a biased, but coherent fully ego-centric belief anchor with a partial probabilistic adjustment to the truth.