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Ambiguous Act Equilibria

36 Pages Posted: 14 Apr 2010 Last revised: 9 Jun 2010

Sophie Bade

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods

Date Written: March 1, 2010

Abstract

A game-theoretic framework that allows for explicitly randomized strategies is used to study the effect of ambiguity aversion on equilibrium outcomes. The notions of "independent strategies" as well as of "common priors" are amended to render them applicable to games in which players lack probabilistic sophistication. Within this framework the equilibrium predictions of two player games with ambiguity averse and with ambiguity neutral players are observationally equivalent. This equivalence result does not extend to the case of games with more than two players. A translation of the concept of equilibrium in beliefs to the context of ambiguity aversion yields substantially different predictions - even for the case with just two players.

Keywords: Uncertainty Aversion, Nash Equilibrium, Ambiguity

JEL Classification: C72, D81

Suggested Citation

Bade, Sophie, Ambiguous Act Equilibria (March 1, 2010). MPI Collective Goods Preprint, No. 2010/09. Available at SSRN: https://ssrn.com/abstract=1586771 or http://dx.doi.org/10.2139/ssrn.1586771

Sophie Bade (Contact Author)

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods ( email )

Kurt-Schumacher-Str. 10
D-53113 Bonn, 53113
Germany

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