Evolutionarily Stable (Mis)specifications: Theory and Applications

TL;DR

This paper develops a framework to analyze how biased or incorrect models of the environment can persist in strategic settings due to their stability and evolutionary advantages, influenced by the learning process of agents.

Contribution

It introduces a novel theoretical framework for evaluating the stability and evolution of (mis)specifications in strategic environments, highlighting the role of the learning channel.

Findings

Mis-specifications can be evolutionarily stable due to the learning channel.

Certain biases can confer an advantage in equilibrium stability.

The framework explains persistence of biased inferences in economic contexts.

Abstract

Toward explaining the persistence of biased inferences, we propose a framework to evaluate competing (mis)specifications in strategic settings. Agents with heterogeneous (mis)specifications coexist and draw Bayesian inferences about their environment through repeated play. The relative stability of (mis)specifications depends on their adherents' equilibrium payoffs. A key mechanism is the learning channel: the endogeneity of perceived best replies due to inference. We characterize when a rational society is only vulnerable to invasion by some misspecification through the learning channel. The learning channel leads to new stability phenomena, and can confer an evolutionary advantage to otherwise detrimental biases in economically relevant applications.