Bounded rationality, strategy simplification, and equilibrium

Hubie Chen ()

International Journal of Game Theory, 2013, vol. 42, issue 3, 593-611

Abstract: It is frequently suggested that predictions made by game theory could be improved by considering computational restrictions when modeling agents. Under the supposition that players in a game may desire to balance maximization of payoff with minimization of strategy complexity, Rubinstein and co-authors studied forms of Nash equilibrium where strategies are maximally simplified in that no strategy can be further simplified without sacrificing payoff. Inspired by this line of work, we introduce a notion of equilibrium whereby strategies are also maximally simplified, but with respect to a simplification procedure that is more careful in that a player will not simplify if the simplification incents other players to deviate. We study such equilibria in two-player machine games in which players choose finite automata that succinctly represent strategies for repeated games; in this context, we present techniques for establishing that an outcome is at equilibrium and present results on the structure of equilibria. Copyright Springer-Verlag 2013

Keywords: Bounded rationality; Automata; Repeated games; Simplification; Strategy complexity (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1007/s00182-011-0293-7

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