Working Paper: CEPR ID: DP18185
Authors: Tuval Danenberg; Ran Spiegler
Abstract: We present an equilibrium concept based on the idea that agents evaluate actions using sample data drawn from the equilibrium distribution, where the number of observations about an alternative is proportional to its usage in a relevant population. Agents naively extrapolate from their data, using the sample mean payoff from each alternative as a predictor of their payoff from choosing it. The endogeneity of sample sizes gives rise to a novel equilibrium effect: Players' assessment of less frequently played actions is noisier. We study the implications of this effect in a single-agent, binary-choice model, as well as in various examples of games.
Keywords: naive inference; bounded rationality
JEL Codes: C79; D01
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| sampling method (C83) | decision-making (D70) |
| endogeneity of sample sizes (C20) | noisier assessments of less frequently played actions (D80) |
| noisier assessments of less frequently played actions (D80) | choice probabilities of these actions (C25) |
| sampling method (C83) | biased evaluations of less frequently played actions (D91) |
| biased evaluations of less frequently played actions (D91) | systematic errors in judgment (D91) |