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 language | American English |
|---|---|
| Pages (from-to) | 1-40 |
| Number of pages | 40 |
| Journal | American Economic Journal: Microeconomics |
| Volume | 12 |
| Issue number | 2 |
| DOIs | |
| State | Published - 1 Apr 2020 |
| Externally published | Yes |
Bibliographical note
Funding Information:* Heller: Bar-Ilan University, Department of Economics, Ramat Gan 5290002, Israel (email: yuval.heller@biu. ac.il); Winter: Lancaster University, Management School, and The Hebrew University, Department of Economics Mount Scopus, Jerusalem 91905, Israel (email: mseyal@mscc.huji.ac.il). John Asker was coeditor for this article. Heller is grateful to the European Research Council for its financial support (ERC starting grant #677057). Winter is grateful to the German-Israeli Foundation for Scientific Research and Google for their financial support. The authors are very grateful to the anonymous referees for very helpful comments and suggestions.
Publisher Copyright:
© 2020, American Economic Association.