Nash equilibrium without mutual knowledge of rationality
AbstractIn 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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Bibliographic InfoArticle provided by Springer in its journal Economic Theory.
Volume (Year): 14 (1999)
Issue (Month): 3 ()
Note: Received: January 28, 1998; revised version October 2, 1998
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Web page: http://link.springer.de/link/service/journals/00199/index.htm
Other versions of this item:
- Kin Chung Lo, 1995. "Nash Equilibrium without Mutual Knowledge of Rationality," Working Papers ecpap-95-04, University of Toronto, Department of Economics.
- 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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