Evolution of Perceptions and Play

39 Pages Posted: 14 Nov 2001

See all articles by Daron Acemoglu

Daron Acemoglu

Massachusetts Institute of Technology (MIT) - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Muhamet Yildiz

Massachusetts Institute of Technology (MIT) - Department of Economics

Date Written: June 2001

Abstract

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.

Keywords: Common prior, evolution, neutral stability, misperceptions, perceptions, rationality

JEL Classification: B40, C72, D84

Suggested Citation

Acemoglu, Daron and Yildiz, Muhamet, Evolution of Perceptions and Play (June 2001). Available at SSRN: https://ssrn.com/abstract=290779 or http://dx.doi.org/10.2139/ssrn.290779

Daron Acemoglu (Contact Author)

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Muhamet Yildiz

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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