Identifying Strategies and Beliefs without Rationality Assumptions

Amos Golan and James Bono ()

No 2010-12, Working Papers from American University, Department of Economics

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.

Keywords: incomplete information; entropy; information theory; pairwise rationality; QRE; endogenous rationality JEL Codes: C70; C79 (search for similar items in EconPapers)
Date: 2010-05
New Economics Papers: this item is included in nep-cbe, nep-gth, nep-hpe and nep-upt
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https://doi.org/10.17606/gt57-ar61 First version, 2010 (application/pdf)

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