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Dynamic Psychological Games

Pierpaolo Battigalli () and Martin Dufwenberg

No 287, Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University

Abstract: Building on recent work on dynamic interactive epistemology, we extend the analysis of extensive-form psychological games (Geneakoplos, Pearce & Stacchetti, Games and Economic Behavior, 1989) to include conditional higher-order beliefs and enlarged domains of payoff functions. The approach allows modeling dynamic psychological effects (such as sequential reciprocity, psychological forward induction, and regret) that are ruled out when epistemic types are identified with hierarchies of initial beliefs. We define a notion of psychological sequential equilibrium, which generalizes the sequential equilibrium notion for traditional games, for which we prove existence under mild assumptions. Our framework also allows us to directly formulate assumptions about ‘dynamic’ rationality and interactive beliefs in order to explore strategic interaction without assuming that players beliefs are coordinated on an equilibrium. In particular, we provide an exploration of (extensive-form) rationalizability in psychological games.

Date: 2005
New Economics Papers: this item is included in nep-cbe and nep-gth
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