Learning What is Similar: Precedents and Equilibrium Selection

53 Pages Posted: 15 May 2018

See all articles by Rossella Argenziano

Rossella Argenziano

University of Essex - Department of Economics

Itzhak Gilboa

Tel Aviv University - Eitan Berglas School of Economics; HEC Paris - Economics & Decision Sciences

Date Written: March 1, 2018

Abstract

We argue that a precedent is important not only because it changes the relative frequency of a certain event, making it positive rather than zero, but also because it changes the way that relative frequencies are weighed. Specifically, agents assess probabilities of future events based on past occurrences, where not all of these occurrences are deemed equally relevant. More similar cases are weighed more heavily than less similar ones. Importantly, the similarity function is also learnt from experience by "second-order induction". The model can explain why a single precedent affects beliefs above and beyond its effect on relative frequencies, as well as why it is easier to establish reputation at the outset than to re-establish it after having lost it. We also apply the model to equilibrium selection in a class of games dubbed "Statis- tical Games", suggesting the notion of Similarity-Nash equilibria, and illustrate the impact of precedents on the play of coordination games.

Suggested Citation

Argenziano, Rossella and Gilboa, Itzhak, Learning What is Similar: Precedents and Equilibrium Selection (March 1, 2018). HEC Paris Research Paper No. ECO/SCD-2018-1264. Available at SSRN: https://ssrn.com/abstract=3178676 or http://dx.doi.org/10.2139/ssrn.3178676

Rossella Argenziano (Contact Author)

University of Essex - Department of Economics ( email )

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom

Itzhak Gilboa

Tel Aviv University - Eitan Berglas School of Economics ( email )

P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel
972-3-640-6423 (Phone)
972-3-640-9908 (Fax)

HEC Paris - Economics & Decision Sciences

Paris
France

Register to save articles to
your library

Register

Paper statistics

Downloads
24
Abstract Views
174
PlumX Metrics