Modelling Equilibrium Play as Governed By Analogy and Limited Foresight

26 Pages Posted: 26 Mar 2006

See all articles by Philipp C. Wichardt

Philipp C. Wichardt

University of Rostock - Department of Economics

Date Written: July 31, 2007

Abstract

This paper proposes a bounded rationality approach to model equilibrium play in games. It is based on the observation that decision makers often do not seem to fully distinguish between different but seemingly similar decisions. To capture this, for each player a similarity grouping of decisions is defined based on equality of available actions and analogy of locally foreseen subtrees. The considered equilibrium concept is a (trembling-hand) perfect Nash-equilibrium (Selten, 1975) in which players are required to choose the same behaviour for similar decisions. Based on the approach, it is shown how the Chain Store Paradox (Selten, 1978) can be resolved, and how mixed equilibria in the Centipede Game (Rosenthal, 1981) can be rationalised.

Keywords: Bounded Rationality, Chain Store Paradox, Imperfect Recall, Limited Foresight, Reasoning by Analogy

JEL Classification: C72, D83

Suggested Citation

Wichardt, Philipp C., Modelling Equilibrium Play as Governed By Analogy and Limited Foresight (July 31, 2007). Available at SSRN: https://ssrn.com/abstract=891961 or http://dx.doi.org/10.2139/ssrn.891961

Philipp C. Wichardt (Contact Author)

University of Rostock - Department of Economics ( email )

Ulmenstr. 69
Rostock, 18057
Germany

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