Biased-Belief Equilibrium

TL;DR

This paper introduces the concept of biased-belief equilibrium in two-player strategic games, where players hold structured distorted beliefs that influence their strategies and persist due to mutual best-responses, providing new insights into stable outcomes.

Contribution

It formalizes biased-belief equilibrium, analyzing how persistent structured belief distortions can influence strategic stability in two-player games.

Findings

Identifies conditions for stable biased-belief equilibria.

Characterizes stable outcomes and biases across different game classes.

Provides sharp predictions for the persistence of belief distortions.

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 (i) each player choose a best-response strategy to his distorted belief about the opponent's strategy, and (ii) 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.