Selfconfirming Equilibrium and Model Uncertainty

We analyze a notion of self-confirming equilibrium with non-neutral ambiguity attitudes that generalizes the traditional concept. We show that the set of equilibria expands as ambiguity aversion increases. The intuition is quite simple: by playing the same strategy in a stationary environment, an agent learns the implied distribution of payoffs, but alternative strategies yield payoffs with unknown distributions; increased aversion to ambiguity makes such strategies less appealing. In sum, a kind of "status quo bias" emerges; in the long run, the uncertainty related to tested strategies disappears, but the uncertainty implied by the untested ones does not. (JEL C72, C73, D81, D83)(This abstract was borrowed from another version of this item.)