Towards a theory of deception

This paper proposes an equilibrium approach to deception where deception is defined to be the process by which actions are chosen to induce erroneous inferences so as to take advantage of them. Specifically, we introduce a framework with boundedly rational players in which agents make inferences based on a coarse information about others' behaviors: Agents are assumed to know only the average reaction function of other agents over groups of situations. Equilibrium requires that the coarse information available to agents is correct, and that inferences and optimizations are made based on the simplest theories compatible with the available information. We illustrate the phenomenon of deception and how reputation concerns may arise even in zero-sum games in which there is no value to commitment. We further illustrate how the possibility of deception affects standard economic insights through a number of stylized applications including a monitoring game and two simple bargaining games. The approach can be viewed as formalizing into a game theoretic setting a well documented bias in social psychology, the Fundamental Attribution Error.