Nash equilibrium without mutual knowledge of rationality |
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Authors: | Kin Chung Lo |
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Institution: | (1) Department of Economics, York University, Toronto, Ontario, M3J 1P3 CANADA , CA |
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Abstract: | Summary. In a Nash equilibrium, players' rationality is mutual knowledge. However, both intuition and experimental evidence suggest
that players do not know for sure the rationality of opponents. This paper proposes a new equilibrium concept, cautious equilibrium, that generalizes Nash equilibrium in terms of preferences in two person strategic games. In a cautious equilibrium, players
do not necessarily know the rationality of opponents, but they view rationality as infinitely more likely than irrationality.
For suitable models of preference, cautious equilibrium predicts that a player might take a “cautious” strategy that is not
a best response in any Nash equilibrium.
Received: January 28, 1998; revised version October 2, 1998 |
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Keywords: | and Phrases: Nash equilibrium Cautious equilibrium Mutual knowledge of rationality |
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