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Wishful Thinking in Strategic Environments

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  • Muhamet Yildiz

Abstract

Towards developing a theory of systematic biases about strategies, I analyse strategic implications of a particular bias: wishful thinking about the strategies. I identify a player as a wishful thinker if she hopes to enjoy the highest pay-off that is consistent with her information about the others' strategies. I develop a straightforward elimination process that characterizes the strategy profiles that are consistent with wishful thinking, mutual knowledge of wishful thinking, and so on. Every pure-strategy Nash equilibrium is consistent with common knowledge of wishful thinking. For generic two-person games, I further show that the pure Nash equilibrium strategies are the only strategies that are consistent with common knowledge of wishful thinking. My analysis also illustrates how one can characterize the strategic implications of general decision rules using the tools of game theory. Copyright 2007, Wiley-Blackwell.

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Paper provided by www.najecon.org in its series NajEcon Working Paper Reviews with number 666156000000000598.

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Date of creation: 11 Mar 2005
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Handle: RePEc:cla:najeco:666156000000000598

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Cited by:
  1. Kfir Eliaz & Rani Spiegler, 2005. "A Mechanism-Design Approach to Speculative Trade," Levine's Bibliography 784828000000000429, UCLA Department of Economics.
  2. Sergei Izmalkov & Muhamet Yildiz, 2010. "Investor Sentiments," American Economic Journal: Microeconomics, American Economic Association, vol. 2(1), pages 21-38, February.
  3. Edward Cartwright & Amrish Patel, 2008. "Public Goods, Social Norms and Naive Beliefs," Studies in Economics 0807, Department of Economics, University of Kent.
  4. Eliaz, Kfir & Spiegler, Ran, 2009. "Bargaining over bets," Games and Economic Behavior, Elsevier, vol. 66(1), pages 78-97, May.

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