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Assessing strategic risk

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  • AUMANN, Robert J.
  • DREZE, Jacques H.

Abstract

In recent decades, subjective probabilities have been increasingly applied to an adversary's choices in strategic games (SGs). In games against nature (GANs), the subjective probability of a state can be elicited from lotteries yielding utility 1 if that state obtains, 0 otherwise. But in SGs, making such a lottery available changes the game, and so the players' incentives. Here, we propose a definition of subjective probabilities in SGs that uses actually available strategies only. The definition applies also to GANs where the decision maker's options are restricted. The probabilities that emerge need not be unique, but expected utilities are unique. (JEL D81)

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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers RP with number -2089.

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Handle: RePEc:cor:louvrp:-2089

Note: In : American Economic Journal: Microeconomics, 1(1), 1-16, 2009
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  1. John C. Harsanyi & Reinhard Selten, 1988. "A General Theory of Equilibrium Selection in Games," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262582384, December.
  2. O'Neill, Barry, 1994. "Game theory models of peace and war," Handbook of Game Theory with Economic Applications, Elsevier, in: R.J. Aumann & S. Hart (ed.), Handbook of Game Theory with Economic Applications, edition 1, volume 2, chapter 29, pages 995-1053 Elsevier.
  3. R. Aumann, 2010. "Subjectivity and Correlation in Randomized Strategies," Levine's Working Paper Archive 389, David K. Levine.
  4. Brandenburger, Adam & Dekel, Eddie, 1987. "Rationalizability and Correlated Equilibria," Econometrica, Econometric Society, Econometric Society, vol. 55(6), pages 1391-1402, November.
  5. Mariotti, Marco, 1995. "Is Bayesian Rationality Compatible with Strategic Rationality?," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 105(432), pages 1099-1109, September.
  6. Joseph B. Kadane & Patrick D. Larkey, 1982. "Subjective Probability and the Theory of Games," Management Science, INFORMS, INFORMS, vol. 28(2), pages 113-120, February.
  7. Aumann, Robert & Brandenburger, Adam, 1995. "Epistemic Conditions for Nash Equilibrium," Econometrica, Econometric Society, Econometric Society, vol. 63(5), pages 1161-80, September.
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Cited by:
  1. DREZE, Jacques H., . "Nested identification of subjective probabilities," CORE Discussion Papers RP, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) -2370, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Lehrer, Ehud & Teper, Roee, 2011. "Justifiable preferences," Journal of Economic Theory, Elsevier, Elsevier, vol. 146(2), pages 762-774, March.
  3. Heinemann, Frank & Nagel, Rosemarie & Ockenfels, Peter, 2004. "Measuring Strategic Uncertainty in Coordination Games," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 6, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  4. Swee-Hoon Chuah & Robert Hoffmann & Jeremy Larner, 2011. "Escalation Bargaining: Theoretical Analysis and Experimental Test," Discussion Papers, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham 2011-05, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
  5. Grant, Simon & Meneghel, Idione & Tourky, Rabee, 2013. "Savage Games: A Theory of Strategic Interaction with Purely Subjective Uncertainty," Risk and Sustainable Management Group Working Papers, University of Queensland, School of Economics 151501, University of Queensland, School of Economics.

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