Coevolution of Deception and Preferences: Darwin and Nash Meet Machiavelli

We develop a framework in which individuals' preferences coevolve with their abilities to deceive others about their preferences and intentions. Specifically, individuals are characterized by (i) a level of cognitive sophistication and (ii) a subjective utility function. Increased cognition is costly, but higher-level individuals have the advantage of being able to completely deceive lower-level opponents about their preferences and intentions. Only individuals who are of the same cognitive level can observe each other's preferences. Our main result shows that, despite the limited possibility to observe preferences, and despite the strong form of deception, essentially only efficient population states can be stable. Moreover, if the marginal cognitive costs are not too high, then only efficient Nash equilibria are stable. We extend our model to study preferences that depend also on the opponent's type.