AbstractThere is evidence that people do not fully take into account how other peopleâs actions are contingent on these othersâ information. This paper defines and applies a new equilibrium concept in games with private information, "cursed equilibrium", which assumes that each player correctly predicts the distribution of other playersâ actions, but underestimates the degree to which these actions are correlated with these other playersâ information. We apply the concept to common-values auctions, where cursed equilibrium captures the widely observed phenomenon of the winnerâs curse. We also show how cursed equilibrium predicts other empirically observed phenomena, such as trade in adverse- selection settings where conventional analysis predicts no trade, and "naÃ¯ve" voting in elections and juries where rational-choice models predict that voters fully take into account the informational content in being pivotal.
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Bibliographic InfoPaper provided by Department of Economics, Institute for Business and Economic Research, UC Berkeley in its series Department of Economics, Working Paper Series with number qt6xf4782t.
Date of creation: 01 Aug 2002
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cursed equilibrium; game theory; adverse selection settings; decision making; voting theory; Social and Behavioral Sciences;
Other versions of this item:
- Eyster, Erik & Rabin, Matthew, 2002. "Cursed Equilibrium," Department of Economics, Working Paper Series qt7p2911dn, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Erik Eyster & Matt Rabin, 2003. "Cursed Equilibrium," Method and Hist of Econ Thought 0303002, EconWPA.
- B49 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Other
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