Revisiting Games of Incomplete Information with Analogy-Based Expectations

Abstract : This paper studies the effects of analogy-based expectations in static two-player games of incomplete information. Players are assumed to be boundedly rational in the way they forecast their opponent's state-contingent strategy: they bundle states into analogy classes and play best-responses to their opponent's average strategy in those analogy classes. We provide general properties of analogy-based expectation equilibria and apply the model to a variety of well known games. We characterize conditions on the analogy partitions for successful coordination in coordination games under incomplete information [Rubinstein, A., 1989. The electronic mail game: Strategic behavior under 'almost common knowledge'. Amer. Econ. Rev. 79, 385-391], we show how analogy grouping of the receiver may facilitate information transmission in Crawford and Sobel's cheap talk games [Crawford, V.P., Sobel, J., 1982. Strategic information transmission. Econometrica 50, 1431-1451], and we show how analogy grouping may give rise to betting in zero-sum betting games such as those studied to illustrate the no trade theorem.
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Philippe Jehiel, Frédéric Koessler. Revisiting Games of Incomplete Information with Analogy-Based Expectations. Games and Economic Behavior, Elsevier, 2008, 62 (2), pp.533-557. ⟨10.1016/j.geb.2007.06.006⟩. ⟨halshs-00754297⟩

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