Projection Equilibrium: Definition and Applications to Social Investment and Persuasion

52 Pages Posted: 1 Jun 2015

See all articles by Kristof Madarasz

Kristof Madarasz

London School of Economics & Political Science (LSE)

Date Written: May 2015


People exaggerate the extent to which their information is shared with others. I introduce such information projections into a large class of Bayesian games where people wrongly think that if they can condition their strategy on an event others can as well. I apply the model to a variety of settings. In the context of social investment, people misattribute the uncertainty others face about their preferences into others having antagonistic preferences. Even if all parties prefer mutual investment, none invests, but comes to believe through interacting with others that she is alone preferring mutual investment. In the context of communication, the model predicts credulity: persuasion by an advisor with a known incentive to lie will nevertheless induce uniformly inflated average posteriors. Complexity of an asset, but greater financial education as well, can enhance such credulity. I extend the model to incorporate ignorance projection and re- late the predictions of projection equilibrium to evidence on common-value trade. Here, consistent with the evidence in Samuelson and Bazerman (1985), the model predicts non-altruistic truth-telling by sellers. For buyers it predicts the winner’s curse and provides a better ?t of the data than BNE or cursed equilibrium. Further applications to zero-sum games and auctions are explored.

Keywords: persuasion belief-bubbles, pluralistic ignorance, projection, social investment

JEL Classification: C7, D03

Suggested Citation

Madarasz, Kristof, Projection Equilibrium: Definition and Applications to Social Investment and Persuasion (May 2015). CEPR Discussion Paper No. DP10636, Available at SSRN:

Kristof Madarasz (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

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