Uncertainty aversion and equilibrium in extensive games

Rothe, Jorn (2011) Uncertainty aversion and equilibrium in extensive games. In: Petrosyan, Leon A. and Zenkevich, Nikolay A., (eds.) Contributions to Game Theory and Management, Vol Iv: the Fourth International Conference Game Theory and Management June 28-30,. Contributions to game theory and management (IV). St Petersburg University, St Petersburg, Russia, pp. 389-406. ISBN 9785992400694

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Abstract

This paper formulates a rationality concept for extensive games in which deviations from rational play are interpreted as evidence of irrationality. Instead of confirming some prior belief about the nature of nonrational play, we assume that such a deviation leads to genuine uncertainty. Assuming complete ignorance about the nature of non-rational play and extreme uncertainty aversion of the rational players, we formulate an equilibrium concept on the basis of Choquet expected utility theory. Equilibrium reasoning is thus only applied on the equilibrium path, maximin reasoning applies off the equilibrium path. The equilibrium path itself is endogenously determined. In general this leads to strategy profiles differ qualitatively from sequential equilibria, but still satisfy equilibrium and perfection requirements. In the centipede game and the finitely repeated prisoners’ dilemma this approach can also resolve the backward induction paradox.

Item Type:	Book Section
Official URL:	http://www.gsom.spbu.ru/en
Additional Information:	© 2011 The Author
Divisions:	Management
Subjects:	H Social Sciences > HB Economic Theory
JEL classification:	C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D58 - Computable and Other Applied General Equilibrium Models
Date Deposited:	25 Jul 2011 08:23
Last Modified:	15 Sep 2023 09:41
URI:	http://eprints.lse.ac.uk/id/eprint/37541

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