Working Paper: CEPR ID: DP12867
Authors: David Danz; Kristof Madarasz; Stephanie Wang
Abstract: We study strategic reasoning and the beliefs people form about the beliefs of others in the presence of private information. We find that while people naively project and think others have the same information as they do, they also anticipate the analogous projection of their differentially-informed opponents onto them. In turn, the typical person explicitly thinks that others form systematically biased beliefs. Specifically, our paper directly tests the model of projection equilibrium, Madarasz (2014, revised 2016), which posits a parsimonious one-to-one relationship between the partial extent to which a player projects and forms biased beliefs about the beliefs others, ρ, and the partial extent to which she anticipates but underestimate the same systematic bias in others' beliefs of her beliefs, ρ². We find that the distribution of the partial extent to which players project onto others and the distribution of the partial extent to which they anticipate others' projection onto them is remarkably consistent with the tight link implied by the model.
Keywords: social cognition; theory of mind; biased higher-order beliefs; projection equilibrium; behavioral organizational economics
JEL Codes: C9; D2; D8; D9
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| informed treatment (D87) | overestimation of success rate (C52) |
| anticipation of bias (D84) | decreased investment (E22) |
| anticipation of projection bias (D84) | higher second-order estimates (C51) |