American Economic Review Vol. 105 No. 2 2015
Self-Confirming Equilibrium and Model Uncertainty
Abstract
We analyze a notion of self-confirming equilibrium with non-neutral ambiguity attitudes that generalizes the traditional concept. We show that the set of equilibria expands as ambiguity aversion increases. The intuition is quite simple: by playing the same strategy in a stationary environment, an agent learns the implied distribution of payoffs, but alternative strategies yield payoffs with unknown distributions; increased aversion to ambiguity makes such strategies less appealing. In sum, a kind of “status quo bias” emerges; in the long run, the uncertainty related to tested strategies disappears, but the uncertainty implied by the untested ones does not.
- DOI
- 10.1257/aer.20130930
- Volume
- 105
- Issue
- 2
- Pages
- 646-677
- Language
- en
- Sources
- openalex bibtex:phds-export.bib crossref