Machine-Learning to Trust

Abstract: Can players sustain long-run trust when their equilibrium beliefs are shaped by machine-learning methods that penalize complexity? I study a game in which an infinite sequence of agents with one-period recall decide whether to place trust in their immediate successor. The cost of trusting is state-dependent. Each player's best response is based on a belief about others' behavior, which is a coarse fit of the true population strategy with respect to a partition of relevant contingencies. In equilibrium, this partition minimizes the sum of the mean-squared prediction error and a complexity penalty proportional to its size. Relative to symmetric mixed-strategy Nash equilibrium, this solution concept significantly narrows the scope for trust.