Identifying Strategies and Beliefs without Rationality Assumptions
AbstractIn this paper we formulate a solution concept without making assumptions about expected utility maximization, common knowledge or beliefs. Beliefs, strate- gies and the degree to which players are expected utility maximizers are endoge- nously determined as part of the solution. To achieve this, rather than solving the game from the players' point of view, we analyze the game as an "observer" who is not engaged in the process of the game. Our approach is an information theoretic one in which the observer utilizes an observation of play and the Maximum Entropy principle. We compare our solution concept with Bayesian Nash equilibrium and over the entropy ratio test as a method for determining the appropriateness of common modeling assumptions. We also demonstrate that the QRE concept can be signicantly generalized when viewed from the observer's perspective. For games of incomplete information we discover that alternative uses of the observer's information lead to alternative interpretations of rationality. These alternative in- terpretations of rationality may prove useful, especially in the context of ex post arbitration, as they indicate who is motivating whom.
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Bibliographic InfoPaper provided by American University, Department of Economics in its series Working Papers with number 2010-12.
Date of creation: May 2010
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Web page: http://www.american.edu/cas/economics/
incomplete information; entropy; information theory; pairwise rationality; QRE; endogenous rationality JEL Codes: C70; C79;
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- JEL - Labor and Demographic Economics - - - - -
- Cod - Mathematical and Quantitative Methods - - - - -
- C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
- C79 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Other
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-01-16 (All new papers)
- NEP-CBE-2011-01-16 (Cognitive & Behavioural Economics)
- NEP-GTH-2011-01-16 (Game Theory)
- NEP-HPE-2011-01-16 (History & Philosophy of Economics)
- NEP-UPT-2011-01-16 (Utility Models & Prospect Theory)
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- Miguel A. Costa-Gomes & Vincent P. Crawford, 2004. "Cognition and Behavior in Two-Person Guessing Games: An Experimental Study," Levine's Bibliography 122247000000000113, UCLA Department of Economics.
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