Cursed Rationalizability

Abstract: Cursed players understand the distribution of opponents' actions and the distribution of the payoff-relevant state, conditional on their own information, but respond as if the two were independent. Cursed equilibrium additionally requires statistically correct beliefs about the distribution of play. We propose a solution concept that separates the bias from equilibrium: cursed rationalizability iteratively deletes every action that is not a cursed response to a conjecture about opponents' surviving play. The cursed-rationalizable set is the interim correlated rationalizable set of a virtual game, in which payoffs are averaged over the state. Under strategic complements, cursed rationalizability yields the same bounds on behavior as cursed equilibrium. A cautious refinement, the analog of admissibility, delivers sharp predictions in the laboratory games that documented the winner's curse.