Evidential equilibria: Heuristics and biases in static games

Standard equilibrium concepts in game theory find it diffi cult to explain the empirical evidence in a large number of static games such as prisoners’ dilemma, voting, public goods, oligopoly, etc. Under uncertainty about what others will do in one-shot games of complete and incomplete information, evidence suggests that people often use evidential reasoning (ER), i.e., they assign diagnostic significance to their own actions in forming beliefs about the actions of other like-minded players. This is best viewed as a heuristic or bias relative to the standard approach. We provide a formal theoretical framework that incorporates ER into static games by proposing evidential games and the relevant solution conceptevidential equilibrium (EE). We derive the relation between a Nash equilibrium and an EE. We also apply EE to several common games including the prisoners’dilemma and oligopoly games.