Evolution of Perceptions and Play
Massachusetts Institute of Technology (MIT) - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)
Massachusetts Institute of Technology (MIT) - Department of Economics
MIT Department of Economics Working Paper No. 01-36
An agent with a misperception may have an evolutionary advantage when others recognize his misperception and its behavioral implications. In such situations evolutionary forces can lead to misperceptions, yielding "irrational behavior," such as the play of strictly dominated strategies. We point out that this reasoning relies on the assumption of subjective rationality-agents are assumed to choose the behavior that maximizes their perceived payoffs. However, subjective rationality does not have solid evolutionary foundations: in the presence of misperceptions, agents who do not maximize their perceived payoffs may have greater fitness than those who do. We show that relaxing the subjective rationality requirement, somewhat paradoxically, leads to effectively rational behavior: although agents may have systematic misperceptions, they will develop other biases to undo these misperceptions, and will act as if they are rational. As a result, systematic biases in experimental settings may not necessarily translate into irrational behavior. We also demonstrate that the same evolutionary forces, in the long run, lead agents to play as if they have a common prior, even though each agent will have different and possibly incorrect perceptions of payoffs and the rules of the game.
Number of Pages in PDF File: 39
Keywords: Common prior, evolution, neutral stability, misperceptions, perceptions, rationality
JEL Classification: B40, C72, D84working papers series
Date posted: November 14, 2001
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