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Unpublished Paper
Projection Equilibrium: Definition and Applications to Social Investment and Persuasion (Sept 2014 version:
  • Kristof Madarasz, London School of Economics and Political Science
People exaggerate the extent to which their private information is shared with others. This paper offers a solution concept for a 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. I first consider a social investment problem where the value of one's investment depends on whether others invest. Players face uncertainty about their opponents valuations. By projecting information, people mis-attribute such symmetric uncertainty into others having antagonistic preferences. Even if all parties prefer mutual investment, none invests, yet all come to believe that others prefer not to invest. In the context of communication with costly state verification, the model predicts credulity: persuasion by advisors, who are known to have an incentive to exaggerate the quality of an asset, will nevertheless induce uniformly exaggerated average posteriors for receivers. When endogenizing the conflict of interest between senders and receivers, I show that such credulous belief-bubbles rise discontinuously as the size of the market or the complexity of the asset increases. Further implications to auctions and zero-sum games are explored. Keywords: Projection, Social Investment, Pluralistic Ignorance, Credulity See updated version at
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Kristof Madarasz. "Projection Equilibrium: Definition and Applications to Social Investment and Persuasion (Sept 2014 version:" (2014)
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