Motivated Beliefs in Coordination Games
57 Pages Posted: 5 Sep 2020 Last revised: 20 Feb 2021
Date Written: Feb 19, 2021
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: Suggested Citation