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Cursed Equilibrium

Author

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  • Eyster, Erik
  • Rabin, Matt

Abstract

There is evidence that people do not fully take into account how other people’s actions are contingent on these others’ 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 players’ actions, but underestimates the degree to which these actions are correlated with these other players’ information. We apply the concept to common-values auctions, where cursed equilibrium captures the widely observed phenomenon of the winner’s 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 "naïve" 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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Suggested Citation

  • Eyster, Erik & Rabin, Matt, 2002. "Cursed Equilibrium," Department of Economics, Working Paper Series qt6xf4782t, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    • Handle: RePEc:cdl:econwp:qt6xf4782t
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    Cited by:

    1. Gary Charness & Dan Levin, 2009. "The Origin of the Winner's Curse: A Laboratory Study," American Economic Journal: Microeconomics, American Economic Association, vol. 1(1), pages 207-236, February.
    2. Vincent P. Crawford & Nagore Iriberri, 2007. "Level-k Auctions: Can a Nonequilibrium Model of Strategic Thinking Explain the Winner's Curse and Overbidding in Private-Value Auctions?," Econometrica, Econometric Society, vol. 75(6), pages 1721-1770, November.
    3. Jehiel, Philippe, 2005. "Analogy-based expectation equilibrium," Journal of Economic Theory, Elsevier, vol. 123(2), pages 81-104, August.

    More about this item

    Keywords

    cursed equilibrium; game theory; adverse selection settings; decision making; voting theory; Social and Behavioral Sciences;
    All these keywords.

    JEL classification:

    • B49 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Other

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