Nash equilibrium without mutual knowledge of rationality

Kin Chung Lo

Economic Theory, 1999, vol. 14, issue 3, 633 pages

Abstract: 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.

Keywords: Nash equilibrium; Cautious equilibrium; Mutual knowledge of rationality. (search for similar items in EconPapers)
JEL-codes: C72 D81 (search for similar items in EconPapers)
Date: 1999-10-14
Note: Received: January 28, 1998; revised version October 2, 1998
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Citations: View citations in EconPapers (19)

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