Motivated Beliefs in Coordination Games

57 Pages Posted: 5 Sep 2020 Last revised: 20 Feb 2021

See all articles by Snehal Banerjee

Snehal Banerjee

University of California, San Diego (UCSD) - Rady School of Management

Jesse Davis

University of North Carolina (UNC) at Chapel Hill - Finance Area

Naveen Gondhi

INSEAD

Date Written: Feb 19, 2021

Abstract

We characterize how wishful thinking affects the interpretation of information in economies with strategic and external effects. While players always choose to exhibit overconfidence in private information, their interpretation of public information depends on how non-fundamental volatility affects payoffs. When volatility increases payoffs, players may endogenously disagree: some under-react to public news, while others overreact. In contrast to rational expectations, public information can increase dispersion in actions while private information can increase aggregate volatility. Our analysis has novel implications for the social value of information and demonstrates how endogenous beliefs can reconcile recent evidence on forecast revisions and information rigidities.

Keywords: anticipatory utility, wishful thinking, beauty contests, coordination games, motivated beliefs

JEL Classification: D62, D82, D83, D84

Suggested Citation

Banerjee, Snehal and Davis, Jesse and Gondhi, Naveen, Motivated Beliefs in Coordination Games (Feb 19, 2021). Available at SSRN: https://ssrn.com/abstract=3662734 or http://dx.doi.org/10.2139/ssrn.3662734

Snehal Banerjee (Contact Author)

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

Jesse Davis

University of North Carolina (UNC) at Chapel Hill - Finance Area

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Naveen Gondhi

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

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