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Bounded Rationality and Correlated Equilibria

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  • Fabrizio Germano
  • Peio Zuazo-Garin

Abstract

We study an interactive framework that explicitly allows for non-rational behavior. We do not place any restrictions on how players can deviate from rational behavior. Instead we assume that there exists a lower bound p 2 [0; 1] such that all players play and are believed to play rationally with a probability p or more. 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 p 2 [0; 1]. 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 compute a measure p that bounds from below the probability with which any given player is choosing actions consistent with payoff maximization and common knowledge of payoff maximization.

Suggested Citation

  • Fabrizio Germano & Peio Zuazo-Garin, 2015. "Bounded Rationality and Correlated Equilibria," Working Papers 812, Barcelona School of Economics.
    • Handle: RePEc:bge:wpaper:812
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    References listed on IDEAS

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    Cited by:

    1. Germano, Fabrizio & Weinstein, Jonathan & Zuazo-Garin, Peio, 2020. "Uncertain rationality, depth of reasoning and robustness in games with incomplete information," Theoretical Economics, Econometric Society, vol. 15(1), January.
    2. Gabriel Ziegler, 2021. "Informational Robustness of Common Belief in Rationality," Papers 2103.02402, arXiv.org, revised Feb 2022.
    3. Ziegler, Gabriel, 2022. "Informational robustness of common belief in rationality," Games and Economic Behavior, Elsevier, vol. 132(C), pages 592-597.

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    More about this item

    Keywords

    strategic interaction; correlated equilibrium; robustness to bounded rationality; approximate knowledge; Incomplete Information; measure of rationality; experiments;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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