Biased-Belief Equilibrium
American Economic Journal: Microeconomics
vol. 12,
no. 2, May 2020
(pp. 1-40)
Abstract
We investigate how distorted, yet structured, beliefs can persist in strategic situations. Specifically, we study two-player games in which each player is endowed with a biased-belief function that represents the discrepancy between a player's beliefs about the opponent's strategy and the actual strategy. Our equilibrium condition requires that (i) each player choose a best-response strategy to his distorted belief about the opponent's strategy, and (ii) the distortion functions form best responses to one another. We obtain sharp predictions and novel insights into the set of stable outcomes and their supporting stable biases in various classes of games.Citation
Heller, Yuval, and Eyal Winter. 2020. "Biased-Belief Equilibrium." American Economic Journal: Microeconomics, 12 (2): 1-40. DOI: 10.1257/mic.20170400Additional Materials
JEL Classification
- C73 Stochastic and Dynamic Games; Evolutionary Games; Repeated Games
- D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
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