Working Paper: CEPR ID: DP10636
Authors: Kristf Madarsz
Abstract: People exaggerate the extent to which their information is shared with others. I introduce such information projections into a large class of Bayesian games where people wrongly think that if they can condition their strategy on an event others can as well. I apply the model to a variety of settings. In the context of social investment, people misattribute the uncertainty others face about their preferences into others having antagonistic preferences. Even if all parties prefer mutual investment, none invests, but comes to believe through interacting with others that she is alone preferring mutual investment. In the context of communication, the model predicts credulity: persuasion by an advisor with a known incentive to lie will nevertheless induce uniformly inflated average posteriors. Complexity of an asset, but greater financial education as well, can enhance such credulity. I extend the model to incorporate ignorance projection and re- late the predictions of projection equilibrium to evidence on common-value trade. Here, consistent with the evidence in Samuelson and Bazerman (1985), the model predicts non-altruistic truth-telling by sellers. For buyers it predicts the winner?s curse and provides a better fit of the data than BNE or cursed equilibrium. Further applications to zero-sum games and auctions are explored.
Keywords: persuasion; belief bubbles; pluralistic ignorance; projection; social investment
JEL Codes: C7; D03
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Individuals misattribute uncertainty about their preferences to others (D80) | Individuals believe that others have antagonistic preferences (D70) |
| Individuals believe that others have antagonistic preferences (D70) | Individuals discourage themselves from investing in mutual investment (G11) |
| Individuals project their information onto others (D83) | Distorted beliefs about the preferences of opponents (D91) |
| Distorted beliefs about the preferences of opponents (D91) | Systematic discrepancy between private attitudes and perceived public attitudes (D72) |
| In communication scenarios, receivers exhibit credulity (D83) | Receivers believe overly optimistic messages from advisors with conflicting incentives (G41) |
| Receivers believe overly optimistic messages from advisors with conflicting incentives (G41) | Inflated average beliefs about asset returns (G17) |
| Inflated average beliefs about asset returns (G17) | Overinvestment in risky assets (G11) |
| Effect of information projection (D83) | Systematic underestimations of trustworthiness in social interactions (Z13) |