Adverse selection and contingent reasoning in preadolescents and teenagers

Abstract

We study from a developmental viewpoint the ability to perform contingent reasoning and the cognitive abilities that facilitate optimal behavior. Individuals from 11 to 17 years old participate in a simplified version of the two-value, deterministic “acquire-a-company” adverse selection game (Charness and Levin, 2009; Martínez-Marquina et al., 2019). We find that even our youngest subjects understand well the basic principles of contingent reasoning (offer the reservation price of one of the sellers), although they do not necessarily choose the optimal price. Performance improves steadily and significantly over the developmental window but it is not facilitated by repeated exposure or feedback. High cognitive ability–measured by a high performance in a working memory task–is necessary to behave optimally in the simplest settings but it is not sufficient to solve the most complex situations.