Optimism and Pessimism in Games.
Paper number: 06/05
Paper date: 1 August, 2005
Paper Category: Working Paper
Jurgen Eichberger and David Kelsey
This paper considers the impact of ambiguity in strategic situations. It extends the earlier literature by allowing for optimistic responses to ambiguity. Ambiguity is modelled by CEU preferences. We study comparative statics of changes in ambiguity-attitude in games with strategic complements or substitutes. This gives a precise statement of the impact of ambiguity on economic behaviour. We also the possibility that players may be overconfident in the sense of over-estimating the probability of favourable outcomes. This has a similar effect of increasing equilibrium strategies in games of strategic complements, Finally we consider RDEU preferences.