Rationality, Inaccurate Mental Models, and Self-confirming Equilibrium

Rational choice theorists have long been ambivalent about the rationality postulate. Although many agree that humans have imperfect foresight and inaccurate understandings of the world within which they act, no satisfactory approach relaxing the rationality postulates exists. In this article, we apply a new method that allows us to model directly rational action when agents have incomplete or inaccurate mental models of their world. In particular, we utilize the game theoretic notion of self-confirming equilibrium. The self-confirming equilibrium framework allows us to model an environment where a player's predictions about one another's behavior are inaccurate. It also allows us to model a common aspect of disputes; viz., that both sides believe they are acting reasonably while the other side is acting unreasonably. Finally, the approach allows a type of surprise in which a player's mis-conjectures about another's behavior results in behavior that was not anticipated. We apply this framework to the problem of the American Revolution, helping to resolve several unexplained puzzles in the historical literature. Historians of the Revolution emphasize the role of ideas in underpinning the revolutionary crisis. From the rational choice standpoint, a critical omission in the literature is that historians do not connect the realm of ideas with the realm of action. We demonstrate how the framework we propose can more directly shed light on three aspects absent in the existing literature. First, to explain why either side fought about abstract ideals or how those ideals were connected to the realm of action, and thus why the two sides failed to come to some accommodation despite their differences. Second, to explain why the colonists became so incensed over seemingly trivial taxes imposed by the British after the Seven Years' War ended in 1763. And, finally, to explain that if the clash of fundamental ideals led the two sides to armed confiict, how the British and the Americans could be unaware of their profound differences during the previous 100 plus years of cooperation.