Evolutionarily Stable (Mis)specifications: Theory and Applications

Abstract: Toward explaining the persistence of biased inferences, we propose a framework to evaluate competing (mis)specifications in strategic settings. Agents with heterogeneous (mis)specifications coexist and draw Bayesian inferences about their environment through repeated play. The relative stability of (mis)specifications depends on their adherents' equilibrium payoffs. A key mechanism is the learning channel: the endogeneity of perceived best replies due to inference. We characterize when a rational society is only vulnerable to invasion by some misspecification through the learning channel. The learning channel leads to new stability phenomena, and can confer an evolutionary advantage to otherwise detrimental biases in economically relevant applications.