Biased-belief equilibrium

Yuval Heller, Eyal Winter

Research output: Contribution to journalArticlepeer-review

6 Scopus citations

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.

Original languageEnglish
Pages (from-to)1-40
Number of pages40
JournalAmerican Economic Journal: Microeconomics
Volume12
Issue number2
DOIs
StatePublished - 1 Apr 2020

Bibliographical note

Publisher Copyright:
© 2020, American Economic Association.

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