Strategic Uncertainty in a Coordination Game

This work develops a model of strategic uncertainty in the context of a coordination game. A tractable dynamic system determines the evolution of behavior and beliefs. The learning process is multifaceted as behavior is controlled not only by simple responses that result from reinforcement learning but it is also influence by Bayesian inferences and strategic reasoning. Strategic uncertainty can persist as behavioral innovations are imperfectly inferred. If experienced stimuli are sufficiently intense, strategic uncertainty can increase. The effect of strategic reasoning on the behavioral reaction to adverse shocks is non-monotonous as it results in dampened reactions under small shocks but amplified reactions for sufficiently large shocks. The inability to anticipate others’ reactions implies larger and more persistent reactions to negative stimuli and reduces the basin of attraction of the payoff dominant equilibrium.