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Robust Multiplicity with a Grain of Naiveté

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  • Aviad Heifetz
  • Willemien Kets

Abstract

In an important paper, Weinstein and Yildiz (2007) show that if players have an infinite depth of reasoning and this is commonly believed, types generically have a unique rationalizable action in games that satisfy a richness condition. We show that this result does not extend to environments where players may have a finite depth of reasoning, or think it is possible that the other player has a finite depth of reasoning, or think that the other player may think that is possible, and so on, even if this so-called "grain of naivete" is arbitrarily small. More precisely, we show that even if there is almost common belief in the event that players have an infinite depth of reasoning, there are types with multiple rationalizable actions, and the same is true for "nearby" types. Our results demonstrate that both uniqueness and multiplicity are robust phenomena when we relax the assumption that it is common belief that players have an infinite depth, if only slightly.

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Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 1573.

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Date of creation: 11 Dec 2013
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Handle: RePEc:nwu:cmsems:1573

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Keywords: Bounded rationality; finite depth of reasoning; global games; higher-order beliefs; generic uniqueness; robust multiplicity JEL Classification: C700; C720; D800; D830;

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References

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