Biased-Belief Equilibrium

American Economic Journal: Microeconomics, forthcoming

67 Pages Posted: 3 Dec 2018 Last revised: 23 Feb 2019

See all articles by Yuval Heller

Yuval Heller

Bar Ilan University

Eyal Winter

Hebrew University of Jerusalem - Department of Economics

Date Written: February 18, 2019

Abstract

We investigate how distorted, yet structured, beliefs can persist in strategic situations. Specifically, we study two-player games in which each player is endowed with a biased-belief function that represents the discrepancy between a player’s beliefs about the opponent's strategy and the actual strategy. Our equilibrium condition requires that: (1) each player choose a best-response strategy to his distorted belief about the opponent's strategy, and (2) the distortion functions form best responses to one another. We obtain sharp predictions and novel insights into the set of stable outcomes and their supporting stable biases in various classes of games.

Suggested Citation

Heller, Yuval and Winter, Eyal, Biased-Belief Equilibrium (February 18, 2019). American Economic Journal: Microeconomics, forthcoming, Available at SSRN: https://ssrn.com/abstract=3281674 or http://dx.doi.org/10.2139/ssrn.3281674

Yuval Heller (Contact Author)

Bar Ilan University ( email )

Dept. of Economics, Building 504
Bar Ilan University
Ramat Gan, 5290002
Israel
+972 5252 82182 (Phone)

HOME PAGE: http://https://sites.google.com/site/yuval26/

Eyal Winter

Hebrew University of Jerusalem - Department of Economics ( email )

Mount Scopus
Jerusalem, 91905
Israel
+972 2 658 4154 (Phone)
+972 2 651 3681 (Fax)

HOME PAGE: http://www.ma.huji.ac.il/%7Emseyal/

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