BEJ

I explore how doubt affects economic outcomes in strategic settings. Doubt is defined as a revision of subjective beliefs over payoff-relevant statistical models consistent with objective evidence, leading to consideration of more extreme possibilities. This work builds upon research on Self-Confirming Equilibrium (SCE) with ambiguity-averse players developed by Battigalli, Cerreia-Vioglio, Maccheroni, and Marinacci (2015), extending it to games with payoff uncertainty and exploring the consequences of differences in the perception of ambiguity. The smooth ambiguity model of Klibanoff, Marinacci, and Mukerji (2005) is applied, for it allows clear separation of attitudes toward ambiguity from its perception. The key finding is that players with heightened awareness of uncertainty present in their decision environment are more likely to exhibit status quo bias, favoring past behavior and leading to objectively worse outcomes. This occurs even when ambiguity aversion is mild. This result is demonstrated through a comparative statics exercise on the equilibrium set, where players’ beliefs are adjusted to reflect varying degrees of ambiguity perception. An application to a simple contracting game illustrates how ambiguity aversion and perception can lead to market shutdowns, such as chronic worker shortages or underinvestment, in spite of mechanisms designed to mitigate these issues.

JEL classification: C72, C73