Misperceiving Mechanisms: Imperfect Perception and the Failure to Recognize Dominant Strategies

Abstract

Because of cognitive constraints, individuals may not perfectly perceive a mechanism's payoff structure, and thus may not realize that the mechanism they face has a dominant strategy. We study the link between misperception of mechanisms and the use of dominant strategies by applying standard techniques from the literatures on imperfect perception, rational attention, and contingent thinking to a widely-used single agent mechanism. For this mechanism, we provide a novel Bayesian model of limited game form recognition and contingent thinking, and by taking this model to experimental data, we find that misperception of this mechanism appears to respond in line with the incentives to perceive the mechanism better.

Keywords: Imperfect perception, rational inattention, contingent thinking, experiments

JEL Classification: I30, C91, D12