Stereotypes can arise from motivated reasoning when social groups interact. Even though identity markers are intrinsically meaningless, agents develop ‘racial’ beliefs, thinking that these visible differences mark differences in ability. These beliefs support a unique asymmetric equilibrium, where one group denigrates the other to achieve a competitive advantage, while remaining oblivious to the stereotyped group's beliefs. Even though the stereotyped group denies the accuracy of these prejudices, they are nevertheless harmed by the discrimination the beliefs cause. Furthermore, stereotypes arise and persist when competitive incentives are unchanged, despite the absence of ‘inherent’ animosity between groups, as this discrimination benefits the dominant group.