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Identifying Strategies and Beliefs without Rationality Assumptions

Author

Listed:
  • Amos Golan
  • James Bono

Abstract

In 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.

Suggested Citation

  • Amos Golan & James Bono, 2010. "Identifying Strategies and Beliefs without Rationality Assumptions," Working Papers 2010-12, American University, Department of Economics.
  • Handle: RePEc:amu:wpaper:2010-12
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    File URL: https://drive.google.com/open?id=1V5Nl--hKBQkp9xjZwoTKxKmOz43OuczH
    File Function: First version, 2010
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    References listed on IDEAS

    as
    1. Colin F. Camerer & Teck-Hua Ho & Juin-Kuan Chong, 2004. "A Cognitive Hierarchy Model of Games," The Quarterly Journal of Economics, Oxford University Press, vol. 119(3), pages 861-898.
    2. Vincent P. Crawford & Miguel A. Costa-Gomes, 2006. "Cognition and Behavior in Two-Person Guessing Games: An Experimental Study," American Economic Review, American Economic Association, vol. 96(5), pages 1737-1768, December.
    3. Golan, Amos, 2007. "Information and entropy econometrics - volume overview and synthesis," Journal of Econometrics, Elsevier, vol. 138(2), pages 379-387, June.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    incomplete information; entropy; information theory; pairwise rationality; QRE; endogenous rationality JEL Codes: C70; C79;

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • C79 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Other

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