Bounded Rationality and Correlated Equilibria

30 Pages Posted: 19 Jan 2016

See all articles by Fabrizio Germano

Fabrizio Germano

Universitat Pompeu Fabra - Department of Economics and Business

Peio Zuazo-Garin

University of the Basque Country

Date Written: November 2, 2015

Abstract

We study an interactive framework that explicitly allows for non-rational behavior. We do not place any restrictions on how players' behavior deviates from rationality. Instead we assume that there exists a probability p such that all players play rationally with at least probability p, and all players believe, with at least probability p, that their opponents play rationally. This, together with the assumption of a common prior, leads to what we call the set of p-rational outcomes, which we define and characterize for arbitrary probability p. We then show that this set varies continuously in p and converges to the set of correlated equilibria as p approaches 1, thus establishing robustness of the correlated equilibrium concept to relaxing rationality and common knowledge of rationality. The p-rational outcomes are easy to compute, also for games of incomplete information, and they can be applied to observed frequencies of play to derive a measure p that bounds from below the probability with which any given player chooses actions consistent with payoff maximization and common knowledge of payoff maximization.

Keywords: strategic interaction, correlated equilibrium, robustness to bounded rationality, approximate knowledge, incomplete information, measure of rationality, experiments

JEL Classification: C72, D82, D83

Suggested Citation

Germano, Fabrizio and Zuazo-Garin, Peio, Bounded Rationality and Correlated Equilibria (November 2, 2015). Available at SSRN: https://ssrn.com/abstract=2717741 or http://dx.doi.org/10.2139/ssrn.2717741

Fabrizio Germano (Contact Author)

Universitat Pompeu Fabra - Department of Economics and Business ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
+34-93-542-2729 (Phone)
+34-93-542-1746 (Fax)

Peio Zuazo-Garin

University of the Basque Country ( email )

Avenida Lehendakari Agirre, 83
Bilbao, Bizkaia 48015
Spain

HOME PAGE: http://www.peiozuazogarin.com

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