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Cursed Equilibrium

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  • Eyster, Erik
  • Rabin, Matthew

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.

Suggested Citation

  • 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.
  • Handle: RePEc:cdl:econwp:qt7p2911dn
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    References listed on IDEAS

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    1. Dyer, Douglas & Kagel, John H & Levin, Dan, 1989. "A Comparison of Naive and Experienced Bidders in Common Value Offer Auctions: A Laboratory Analysis," Economic Journal, Royal Economic Society, vol. 99(394), pages 108-115, March.
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    Keywords

    curses;

    JEL classification:

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

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