Wishful thinking in strategic environments
By: Muhamet Yildiz/
Contributors: Massachusetts Institute of Technology. Dept. of Economics
Series: Working paper series / Massachusetts Institute of Technology, Dept. of Economics -- working paper 04-31; Working paper (Massachusetts Institute of Technology. Dept. of Economics) -- no. 04-31.
Publisher: Massachusetts Institute of Technology, Dept. of Economics
Published: 2004
Place of publication: Cambridge, MA
Language: eng
Number of pages: 30
Description: B Towards developing a theory of systematic biases about strategies, I analyze strategic implications of a particular bias: wishful thinking about the strategies. Considering canonical state spaces for strategic uncertainty, I identify a player as a wishful thinker at a state if she hopes to enjoy the highest payoff that is consistent with her information about the others' strategies at that state. 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, providing an unusual epistemic characterization for equilibrium strategies. I also investigate the strategic implications of rationality and ex-post optimism, the situation in which a player's expected payoff weakly exceeds her actual payoff. I show that, in generic games with monotonic payoff functions, these strategic implications are identical to those of wishful thinking. Keywords: optimism, strategic uncertainty, wishful thinking, self-serving biases, common-prior assumption, equilibrium. JEL Classifications: C72, D80.
Notes: "September 1, 2004."

Includes bibliographical references (p. 29-30).

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