Journal Article

Wishful Thinking in Strategic Environments

Muhamet Yildiz

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 74, issue 1, pages 319-344
Published in print January 2007 | ISSN: 0034-6527
Published online January 2007 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/j.1467-937X.2007.00423.x
Wishful Thinking in Strategic Environments

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  • Game Theory and Bargaining Theory
  • Information, Knowledge, and Uncertainy

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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.

Keywords: C72; D83

Journal Article.  15156 words.  Illustrated.

Subjects: Game Theory and Bargaining Theory ; Information, Knowledge, and Uncertainy

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