Wishful Thinking in Strategic Environments

37 Pages Posted: 3 Sep 2004

See all articles by Muhamet Yildiz

Muhamet Yildiz

Massachusetts Institute of Technology (MIT) - Department of Economics

Date Written: September 1, 2004

Abstract

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 Classification: C72, D80

Suggested Citation

Yildiz, Muhamet, Wishful Thinking in Strategic Environments (September 1, 2004). Available at SSRN: https://ssrn.com/abstract=586681 or http://dx.doi.org/10.2139/ssrn.586681

Muhamet Yildiz (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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