We provide an equilibrium framework for modeling the behavior of an agent who holds a simplified view of a dynamic optimization problem. The agent faces a Markov decision process, where a transition probability function determines the evolution of a state variable as a function of the previous...

I propose a new solution concept—behavioral equilibrium—to study environments with players who are naive, in the sense that they fail to account for the informational content of other players' actions. I apply the framework to certain adverse selection settings and show that, contrary to the...