research articles : Nash equilibrium without mutual knowledge of rationality

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research articles : Nash equilibrium without mutual knowledge of rationality

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Kin Chung Lo (Department of Economics, York University, Toronto, Ontario, M3J 1P3 CANADA)

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Kin Chung Lo

Abstract

In a Nash equilibrium, players' rationality is mutual knowledge. However, both intuition and experimental evidence suggest that players do not know for sure the rationality of opponents. This paper proposes a new equilibrium concept, cautious equilibrium, that generalizes Nash equilibrium in terms of preferences in two person strategic games. In a cautious equilibrium, players do not necessarily know the rationality of opponents, but they view rationality as infinitely more likely than irrationality. For suitable models of preference, cautious equilibrium predicts that a player might take a "cautious" strategy that is not a best response in any Nash equilibrium.

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Article provided by Springer in its journal Economic Theory.

Volume (Year): 14 (1999)
Issue (Month): 3 ()
Pages: 621-633
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Handle: RePEc:spr:joecth:v:14:y:1999:i:3:p:621-633

Note: Received: January 28, 1998; revised version October 2, 1998
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Find related papers by JEL classification:
C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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