Mistaken self-perception and equilibrium

Abstract

Motivated by real-world information economics problems and by experimental findings on overconfidence, this paper introduces a general epistemic construction to model strategic interaction with incomplete information, where the players’ self-perception may be mistaken. This allows us to rigorously describe equilibrium play, by formulating appropriate equilibrium concepts. We show that there always exist “objective” equilibria, where the players correctly anticipate each other’s strategies without attempting to make sense of them, and that these outcomes coincide with the equilibria of an associated Bayesian game with subjective priors. In population games, these equilibria can also be always introspectively rationalized by the players, despite their possibly mistaken self-perception. Copyright Springer-Verlag Berlin/Heidelberg 2006