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Finite dynamic games with full rationality and inconsistently aligned beliefs: Can the N-person backward induction deliver a solution?

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  • Varoufakis, Yanis

Abstract

Recent work has cast considerable doubt on the plausibility of specific assumptions about how rational agents form out-of-equilibrium beliefs in finite extensive games in which beliefs are induced backwards. The point is that the resulting consistently aligned beliefs are incoherent in view of the counterfactuals they rely on. This paper asks: how will the possibility of inconsistently aligned beliefs affect the manner in which rational players play such games? It shows that, provided beliefs are aligned monotonically, the more interesting qualitative features of the conventional approach remain unchanged.

Suggested Citation

  • Varoufakis, Yanis, 2013. "Finite dynamic games with full rationality and inconsistently aligned beliefs: Can the N-person backward induction deliver a solution?," International Journal of Development and Conflict, Gokhale Institute of Politics and Economics, vol. 3(1), pages 63-70.
  • Handle: RePEc:gok:ijdcv1:v:3:y:2013:i:1:p:63-70
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    References listed on IDEAS

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    1. Kreps, David M. & Milgrom, Paul & Roberts, John & Wilson, Robert, 1982. "Rational cooperation in the finitely repeated prisoners' dilemma," Journal of Economic Theory, Elsevier, vol. 27(2), pages 245-252, August.
    2. Drew Fudenberg & David M. Kreps & David K. Levine, 2008. "On the Robustness of Equilibrium Refinements," World Scientific Book Chapters,in: A Long-Run Collaboration On Long-Run Games, chapter 5, pages 67-93 World Scientific Publishing Co. Pte. Ltd..
    3. Binmore, Ken, 1987. "Modeling Rational Players: Part I," Economics and Philosophy, Cambridge University Press, vol. 3(02), pages 179-214, October.
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