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Analogy-based Expectation Equilibrium

Author

Listed:
  • Philippe Jehiel

    (CERAS - Centre d'enseignement et de recherche en analyse socio-économique - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique, Department of Economics - UCL - University College London [UCL])

Abstract

In complex situations, agents use simplified representations to learn how their environment may react. I assume that agents bundle nodes at which other agents must move into analogy classes, and agents only try to learn the average behavior in every class. Specifically, I propose a new solution concept for multi-stage games with perfect information: at every node players choose best-responses to their analogy-based expectations, and expectations correctly represent the average behavior in every class. The solution concept is shown to differ from existing concepts, and it is applied to a variety of games, in particular the centipede game, and ultimatum/bargaining games. The approach explains in a new way why players may Pass for a large number of periods in the centipede game, and why the responder need not be stuck to his reservation value in ultimatum games. Some possible avenues for endogenizing the analogy grouping are also suggested.

Suggested Citation

  • Philippe Jehiel, 2005. "Analogy-based Expectation Equilibrium," Post-Print halshs-00754070, HAL.
    • Handle: RePEc:hal:journl:halshs-00754070
    DOI: 10.1016/j.jet.2003.12.003
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    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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