Self-Confirming Equilibrium and Model Uncertainty
American Economic Review
vol. 105,
no. 2, February 2015
(pp. 646-77)
Abstract
We analyze a notion of self-confirming equilibrium with non-neutral ambiguity attitudes that generalizes the traditional concept. We show that the set of equilibria expands as ambiguity aversion increases. The intuition is quite simple: by playing the same strategy in a stationary environment, an agent learns the implied distribution of payoffs, but alternative strategies yield payoffs with unknown distributions; increased aversion to ambiguity makes such strategies less appealing. In sum, a kind of "status quo bias" emerges; in the long run, the uncertainty related to tested strategies disappears, but the uncertainty implied by the untested ones does not. (JEL C72, C73, D81, D83)Citation
Battigalli, Pierpaolo, Simone Cerreia-Vioglio, Fabio Maccheroni, and Massimo Marinacci. 2015. "Self-Confirming Equilibrium and Model Uncertainty." American Economic Review, 105 (2): 646-77. DOI: 10.1257/aer.20130930Additional Materials
JEL Classification
- C72 Noncooperative Games
- C73 Stochastic and Dynamic Games; Evolutionary Games; Repeated Games
- D81 Criteria for Decision-Making under Risk and Uncertainty
- D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness