Optimal Strategic Beliefs
22 Pages Posted: 18 Mar 2009
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Optimal Strategic Beliefs
Date Written: March 18, 2009
Abstract
We provide a discipline for belief formation through a model of subjective beliefs, in which agents hold incorrect but strategic beliefs. More precisely, we consider beliefs as a strategic variable that agents can choose (consciously or not) in order to maximize their utility at the equilibrium. We find that strategic behaviour leads to belief subjectivity and heterogeneity. Optimism (resp. overconfidence) as well as pessimism (resp. doubt) both emerge as optimal beliefs. Furthermore, we obtain a positive correlation between pessimism (resp. doubt) and risk-tolerance.
Keywords: beliefs formation, strategic beliefs, optimal beliefs, distorded beliefs
JEL Classification: D81, D84, G12, D03
Suggested Citation: Suggested Citation
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