- homepage: https://sites.google.com/site/yuval26/
Department of Economics (Building 504), Bar-Ilan University, Ramat Gan 5290002 Israel. - +44-5252-82182
Yuval Heller
Bar-Ilan University, Economics, Faculty Member
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For a long time economists took preferences as given. The study of their origin and formation was considered a question outside the scope of economics. Over the past twenty years this has changed dramatically. In particular there is now a... more
For a long time economists took preferences as given. The study of their origin and formation was considered a question outside the scope of economics. Over the past twenty years this has changed dramatically. In particular there is now a large literature on the evolutionary foundations of preferences (for an overview see [6]). A prominent strand of this literature is the so-called “indirect evolutionary approach” to game theory, as pioneered by [2]. It has been used to explain the existence of a number of “non-standard” preferences –, i.e preferences that do not coincide with material payoffs. For example [4] study the evolution of reciprocity in the form of a taste for rejecting unfair offers. [7] consider reciprocity in the form of preferences that are conditional on the opponent’s preference type. [5] investigate survival of more general interdependent preferences in aggregative games. A crucial feature of these models is that they explicitly or implicitly assume that preference...
This appendix includes 9 sections. Section A illustrates how a typical optimal bias function g∗ looks like. Sections B-I present several extensions and variants of our model. In Section B we allow agents to have bias also with respect to... more
This appendix includes 9 sections. Section A illustrates how a typical optimal bias function g∗ looks like. Sections B-I present several extensions and variants of our model. In Section B we allow agents to have bias also with respect to conventional choices, and we show that our results essentially remain the same. Section C extends the model to a setup where a conventional choice is safer (has a smaller variance). In Section D we reformulate the model to capture overconfidence as underestimating the variance of a continuous noisy signal. Section E extends our results to a setup where private information is costly, and each agent has to invest effort in improving the accuracy of his personal judgment. In Section F we demonstrate that our results do not hold for a small number of agents, and we show that principals would prefer to have many agents. Section G shows that our results also hold when agents are informed experts who recommend the principal which action to choose, and when...
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We investigate how distorted, yet structured, beliefs can persist in strategic situations. Specifically, we study two-player games in which each player is endowed with a biased-belief function that represents the discrepancy between a... more
We investigate how distorted, yet structured, beliefs can persist in strategic situations. Specifically, we study two-player games in which each player is endowed with a biased-belief function that represents the discrepancy between a player’s beliefs about the opponent’s strategy and the actual strategy. Our equilibrium condition requires that (i) each player choose a best-response strategy to his distorted belief about the opponent’s strategy, and (ii) the distortion functions form best responses to one another. We obtain sharp predictions and novel insights into the set of stable outcomes and their supporting stable biases in various classes of games. (JEL C73, D83)
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Abstract In Heller and Mohlin (2017) we develop a framework in which individuals' preferences coevolve with their abilities to deceive others about their preferences and intentions. Specifically, individuals are characterised by (i) a... more
Abstract In Heller and Mohlin (2017) we develop a framework in which individuals' preferences coevolve with their abilities to deceive others about their preferences and intentions. Specifically, individuals are characterised by (i) a level of cognitive sophistication and (ii) a subjective utility function. Increased cognition is costly, but higher-level individuals have the advantage of being able to deceive lower-level opponents about their preferences and intentions in some of the matches. In the remaining matches, the individuals perfectly observe each other's preferences. Our main result shows that, essentially, only efficient outcomes can be stable. Moreover, under additional mild assumptions, we show that an efficient outcome is stable if and only if the gain from unilateral deviation is smaller than the effective cost of deception in the environment. In this supplementary analysis we relax the assumption of perfect observability in matches without deception, and study the robustness of our main results to the introduction of partial observability.
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We study a variant of the repeated prisoner’s dilemma with uncertain horizon, in which each player chooses his foresight ability; that is, the timing in which he is informed about the realized length of the interaction. In addition, each... more
We study a variant of the repeated prisoner’s dilemma with uncertain horizon, in which each player chooses his foresight ability; that is, the timing in which he is informed about the realized length of the interaction. In addition, each player has an independent probability to observe the opponent’s foresight ability. We show that if this probability is not too close to 0 or 1, then the game admits an evolu-tionarily stable strategy, in which agents who look one step ahead and agents who look three steps ahead coexist. Moreover, this is the unique evolutionarily stable strategy in which players play efficiently at early stages of the interaction. We in-terpret our results as a novel evolutionary foundation for limited foresight and as a new mechanism to induce cooperation in the repeated prisoner’s dilemma.
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We analyze the influence of unsecured debt (subdebt) on risk-shifting in banks whose assets are risky debt claims. We assume that the stockholders and subdebtholders jointly decide on risk-shifting. We show that replacing part of the... more
We analyze the influence of unsecured debt (subdebt) on risk-shifting in banks whose assets are risky debt claims. We assume that the stockholders and subdebtholders jointly decide on risk-shifting. We show that replacing part of the stock with subdebt: (1) leads to fewer risk-shifting events, but can lead to higher levels of risk, depending on the relative bargaining power, (2) does not change the level of riskshifting when side payments are possible, and (3) may yield the surprising result that risk-shifting increases with tighter regulatory control.
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In various environments new agents may base their decisions on observations of actions taken by a few other agents in the past. In this paper we analyze a broad class of such social learning processes, and study under what circumstances... more
In various environments new agents may base their decisions on observations of actions taken by a few other agents in the past. In this paper we analyze a broad class of such social learning processes, and study under what circumstances the initial behavior of the population has a lasting effect. Our results show that this question strongly depends on the expected number of actions observed by new agents. Specifically, we show that if the expected number of observed actions is: (1) less than one, then the population converges to the same behavior independently of the initial state; (2) between one and two, then in some (but not all) environments there are decision rules for which the initial state has a lasting impact on future behavior; and (3) more than two, then in all environments there is a decision rule for which the initial state has a lasting impact.
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We study environments in which agents are randomly matched to play a Prisoner’s Dilemma, and each player observes a few of the partner’s past actions against previous opponents. We depart from the existing related literature by allowing a... more
We study environments in which agents are randomly matched to play a Prisoner’s Dilemma, and each player observes a few of the partner’s past actions against previous opponents. We depart from the existing related literature by allowing a small fraction of the population to be commitment types. The presence of committed agents destabilizes previously proposed mechanisms for sustaining cooperation. We present a novel intuitive combination of strategies that sustains cooperation in various environments. Moreover, we show that under an additional assumption of stationarity, this combination of strategies is essentially the unique mechanism to support full cooperation, and it is robust to various perturbations. Finally, we extend the results to a setup in which agents also observe actions played by past opponents against the current partner, and we characterize which observation structure is optimal for sustaining cooperation.
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Demichelis and Weibull (2008) show that adding lexicographic lying costs to coordination games with cheap talk yields a sharp prediction: only the efficient outcome is evolutionarily stable. I show that this result is caused by the... more
Demichelis and Weibull (2008) show that adding lexicographic lying costs to coordination games with cheap talk yields a sharp prediction: only the efficient outcome is evolutionarily stable. I show that this result is caused by the discontinuity of preferences rather than by small lying costs per se. Finally, I discuss why discontinuity may not be an appealing assumption in evolutionary models.
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We study a variant of the repeated prisoner’s dilemma with uncertain horizon, in which each player chooses his foresight ability; that is, the timing in which he is informed about the realized length of the interaction. In addition, each... more
We study a variant of the repeated prisoner’s dilemma with uncertain horizon, in which each player chooses his foresight ability; that is, the timing in which he is informed about the realized length of the interaction. In addition, each player has an independent probability to observe the opponent’s foresight ability. We show that if this probability is not too close to 0 or 1, then the game admits an evolutionarily stable strategy, in which agents who look one step ahead and agents who look three steps ahead coexist. Moreover, this is the unique evolutionarily stable strategy in which players play efficiently at early stages of the interaction. We interpret our results as a novel evolutionary foundation for limited foresight and as a new mechanism to induce cooperation in the repeated prisoner’s dilemma.
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We study the strategic advantages of following rules of thumb that bundle different games together (called rule rationality) when this may be observed by one's opponent. We present a model in which the strategic environment determines... more
We study the strategic advantages of following rules of thumb that bundle different games together (called rule rationality) when this may be observed by one's opponent. We present a model in which the strategic environment determines which kind of rule rationality is adopted by the players. We apply the model to characterize the induced rules and outcomes in various interesting environments. Finally, we show the close relations between act rationality and “Stackelberg stability” (no player can earn from playing first).
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In many situations, such as trade in stock exchanges, agents have many opportunities to act within a short interval of time. The agents in such situations can often coordinate their actions in advance, but coordination during the game... more
In many situations, such as trade in stock exchanges, agents have many opportunities to act within a short interval of time.
The agents in such situations can often coordinate their actions in advance, but coordination during the game consumes
too much time. An equilibrium in such situations has to be sequential in order to handle mistakes made by players. In
this paper, we present a new solution concept for infinite-horizon dynamic games, which is appropriate for such situations:
a sequential normal-form correlated approximate equilibrium. Under additional assumptions, we show that every such game
admits this kind of equilibrium.
The agents in such situations can often coordinate their actions in advance, but coordination during the game consumes
too much time. An equilibrium in such situations has to be sequential in order to handle mistakes made by players. In
this paper, we present a new solution concept for infinite-horizon dynamic games, which is appropriate for such situations:
a sequential normal-form correlated approximate equilibrium. Under additional assumptions, we show that every such game
admits this kind of equilibrium.
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We develop a framework in which individuals' preferences coevolve with their abilities to deceive others about their preferences and intentions. Specifically, individuals are characterised by (i) a level of cognitive sophistication and... more
We develop a framework in which individuals' preferences coevolve with their abilities to deceive others about their preferences and intentions. Specifically, individuals are characterised by (i) a level of cognitive sophistication and (ii) a subjective utility function. Increased cognition is costly, but higher-level individuals have the advantage of being able to deceive lower-level opponents about their preferences and intentions in some of the matches. In the remaining matches, the individuals observe each other's preferences. Our main result shows that, essentially, only efficient outcomes can be stable. Moreover, under additional mild assumptions, we show that an efficient outcome is stable if and only if the gain from unilateral deviation is smaller than the effective cost of deception in the environment.
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We study the idea that seemingly unrelated behavioral biases can coevolve if they jointly compensate for the errors that any one of them would give rise to in isolation. We suggest that the “endowment effect” and the “winner's curse”... more
We study the idea that seemingly unrelated behavioral biases can coevolve if they jointly compensate for the errors that any one of them would give rise to in isolation. We suggest that the “endowment effect” and the “winner's curse” could have jointly survived natural selection together. We develop a new family of “hybrid‐replicator” dynamics. Under such dynamics, biases survive in the population for a long period of time even if they only partially compensate for each other and despite the fact that the rational type's payoff is strictly larger than the payoffs of all other types.
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Sorin (1998, mimeo) presented the notion of distribution equilibrium as a correlated equilibrium in which the expected payo of each agent is independent of his signal, and motivated it in population games. We say that a mediator is weak... more
Sorin (1998, mimeo) presented the notion of distribution equilibrium as a correlated equilibrium in which the expected payo of each agent is independent of his signal, and motivated it in population games. We say that a mediator is weak if players have the ability to restart the mediation process after receiving their recommend actions. We demonstrate situations where mediators are weak, relate it to pre-play communication, and use it as a novel rationale for distribution equilibrium.
Various papers have presented folk theorem results for repeated games with private monitoring that rely on belief-free equilibria. I show that these equilibria are not robust against small perturbations in the behavior of potential... more
Various papers have presented folk theorem results for repeated games with private monitoring that rely on belief-free equilibria. I show that these equilibria are not robust against small perturbations in the behavior of potential opponents. Specifically, I show that essentially none of the belief-free equilibria is evolutionarily stable, and that in generic games none of these equilibria is neutrally stable. Moreover, in a large family of games (which includes many public good games), the belief-free equilibria fail to satisfy even a very mild stability refinement.
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A leading solution concept in the evolutionary study of extensive-form games is Selten (1983) notion of limit ESS. This note demonstrates that a limit ESS does not imply neutral stability, and that it may be dynamically unstable (almost... more
A leading solution concept in the evolutionary study of extensive-form games is Selten (1983) notion of limit ESS. This note demonstrates that a limit ESS does not imply neutral stability, and that it may be dynamically unstable (almost any small perturbation takes the population away). These problems arise due to an implicit assumption that “mutants” are arbitrarily rare relative to “trembling” incumbents. Finally, I present a novel definition that solves this issue and has appealing properties.
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A strong correlated equilibrium is a correlated strategy profile that is immune to joint deviations. Existing solution concepts assume that players receive simultaneously correlated recommendations from the mediator. An ex-ante strong... more
A strong correlated equilibrium is a correlated strategy profile that is immune to joint deviations. Existing solution concepts assume that players receive simultaneously correlated recommendations from the mediator. An ex-ante strong correlated equilibrium
(Moreno and Wooders, 1996) is immune to deviations that are planned before receiving
the recommendations. In this note we focus on mediation protocols where players may
get their recommendations at several stages, and show that an ex-ante strong correlated
equilibrium is immune to deviations at all stages of the protocol.
(Moreno and Wooders, 1996) is immune to deviations that are planned before receiving
the recommendations. In this note we focus on mediation protocols where players may
get their recommendations at several stages, and show that an ex-ante strong correlated
equilibrium is immune to deviations at all stages of the protocol.
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This paper analyzes the implementation of correlated equilibria that are immune to joint deviations of coalitions by cheap-talk protocols. We construct a cheap-talk protocol that is resistant to deviations of fewer than half the players,... more
This paper analyzes the implementation of correlated equilibria that are immune to joint
deviations of coalitions by cheap-talk protocols. We construct a cheap-talk protocol that is resistant to deviations of fewer than half the players, and using it, we show that a large set of correlated equilibria can be implemented as Nash equilibria in the extended game with cheap-talk. Furthermore, we demonstrate that in general there is no cheap-talk protocol that is resistant for deviations of half the players.
deviations of coalitions by cheap-talk protocols. We construct a cheap-talk protocol that is resistant to deviations of fewer than half the players, and using it, we show that a large set of correlated equilibria can be implemented as Nash equilibria in the extended game with cheap-talk. Furthermore, we demonstrate that in general there is no cheap-talk protocol that is resistant for deviations of half the players.
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This paper studies extensive form games with public information where all players have the same information at each point in time. We prove that when there are at least three players, all communication equilibrium payoffs can be obtained... more
This paper studies extensive form games with public information where all players have the same information at each point in time. We prove that when there are at least three players, all communication equilibrium payoffs can be obtained by unmediated cheap-talk procedures. The result encompasses repeated games and stochastic games.
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Most existing decision-making models assume that choice behavior is based on preference maximization even when the preferences are incomplete. In this paper we study an alternative approach – “justifiable choice”: each agent has several... more
Most existing decision-making models assume that choice behavior is based on preference maximization even when the preferences are incomplete. In this paper we study an alternative approach – “justifiable choice”: each agent has several preference relations (“justifications”), and she can use each justification in every choice problem. We present a new behavioral property that requires an alternative to be chosen if it is not inferior to all mixtures of chosen alternatives, and show that this property characterizes justifiable choice. The main application of this property yields a multiple-utility representation, which substantially differs from existing related representations. In addition, we obtain a multiple-prior representation, and study the notions of indecisiveness and being more decisive.
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Experimental evidence suggests that people tend to be overconfident in the sense that they overestimate the accuracy of their private information. In this paper, we show that risk-averse principals might prefer overconfident agents in... more
Experimental evidence suggests that people tend to be overconfident in the sense that they overestimate the accuracy of their private information. In this paper, we show that risk-averse principals might prefer overconfident agents in various strategic interactions because these agents help diversify the aggregate risk. This may help understanding why successful analysts and entrepreneurs tend to be overconfident. In addition, a different interpretation of the model presents a novel evolutionary foundation for overconfidence, and explains various stylized facts about this bias.