Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
viii
CONSISTENT PREFERENCES
5.3
62
6. RELAXING COMPLETENESS
6.1 Epistemic modeling of strategic games (cont.)
6.2 Consistency of preferences (cont.)
6.3 Admissible consistency of preferences (cont.)
69
69
73
75
7. BACKWARD INDUCTION
7.1 Epistemic modeling of extensive games
7.2 Initial belief of opponent rationality
7.3 Belief in each subgame of opponent rationality
7.4 Discussion
79
82
87
89
94
8. SEQUENTIALITY
8.1 Epistemic modeling of extensive games (cont.)
8.2 Sequential consistency
8.3 Weak sequential consistency
8.4 Relation to backward induction
99
101
104
107
113
9. QUASI-PERFECTNESS
9.1 Quasi-perfect consistency
9.2 Relating rationalizability concepts
115
116
118
10. PROPERNESS
10.1 An illustration
10.2 Proper consistency
10.3 Relating rationalizability concepts (cont.)
10.4 Induction in a betting game
121
123
124
127
128
133
135
138
142
149
152
List of Figures
2.1
G1 (battle-of-the-sexes).
12
2.2
13
2.3
2.4
G03
2.5
G02
G01
2.6
13
03
(a cen-
14
16
17
3.1
25
4.1
39
7.1
93
8.1
111
8.2
06
112
10.1
123
10.2
A betting game.
129
10.3
130
11.1
134
11.2
136
142
156
11.3
12.1
xii
CONSISTENT PREFERENCES
12.2
12.3
12.4
12.5
166
169
171
172
List of Tables
0.1
2.1
2.2
3.1
7.1
7.2
10.1
12.1
Preface
xvi
CONSISTENT PREFERENCES
Table 0.1.
Chapter 11 Chapter 12
Chapter 1
Chapter 2
Chapter 4
&
&
Chapter 3
Chapter 6
Chapter 5
Chapter 10
Motivation
Preliminaries
Strategic
games
Chapter 7
Chapter 8
Chapter 9
Extensive
games
reasoning in extensive games was awarded the Royal Economic Society Prize
for the best paper published in the Economic Journal in 2003.
Chapter 1
INTRODUCTION
CONSISTENT PREFERENCES
of his opponent; cf., e.g., Harsanyi (1973), Aumann (1987a), and Blume
et al. (1991b). What is new in this book (and the papers on which
it builds) is that such a consistent preferences approach is used to
characterize a wider set of equilibrium concepts and, in particular, to
serve as a basis for various types of interactive epistemic analysis where
equilibrium assumptions are not made.
Throughout this book, games are analyzed from the subjective perspective of each player. Hence, we can only make subjective statements
about what a player will do, by considering reasonable preferences
(and the corresponding representation in terms of subjective probabilities) of his opponent. This subjective perspective is echoed by recent
contributions like Feinberg (2004a) and Kaneko and Kline (2004), which
however differ from the present approach in many respects.1
To illustrate the differences between the two approachesthe rational choice approach on the one hand and the consistent preferences
approach on the otherin a setting that will be familiar to most readers, Section 1.1 will be used to consider how epistemic conditions for
Nash equilibrium in a strategic game can be formulated within each of
these approaches.
The remaining Sections 1.2 and 1.3 will provide motivation for the
consistent preferences approach through the following two points:
1 It facilitates the analysis of backward and forward induction.
2 It facilitates the integration of game theory and epistemic analysis
with the underlying decision-theoretic foundation.
1.1
1 In
the present text, reasoning about hypothetical events will be captured by each player having an initial (interim after having become aware of his own type) system of conditional
preferences; cf. Chapters 3 and 4. This system encodes how the player will update his beliefs
as actual play develops. In contrast, the subjective framework of Feinberg (2004a) does not
represent the reasoning from such an interim viewpoint, and beliefs are not constrained to
be evolving or revised. Instead, beliefs are represented whenever there is a decision to be
made based on the presumption that beliefs should only matter when a decision is made. In
Feinbergs framework, only the ex-post beliefs are present and all ex-post subjective views
are equally modeled. Even though also Kaneko and Kline (2004) consider a player having
a subjective view on the objective situation, their main point is the inductive derivation of
this individual subjective view from individual experiences.
Introduction
tj
This in turn determines is set of best responses at ti , which will throughout be referred to as is choice set at ti :
Siti := {si Si | s0i Si , si ti s0i } .
Finally, in the context of the rational choice approach, we can define
the set of type profiles for which player i chooses rationally:
[rati ] := {(t1 , t2 ) T1 T2 | si (ti ) Siti } .
Write [rat] := [rat1 ] [rat2 ].
CONSISTENT PREFERENCES
tj
sj
tj
Introduction
However, we are now concerned with what i at ti believes that opponent types do, rather than with what i at ti does himself. Naturally,
such beliefs will only be well-defined for opponent types that ti deems
subjectively possible, i.e., for player j types in the set
n
o
ti (sj , tj )
.
ti (Sj , tj )
n
0 o
0
such that (p1 , p2 ) = p1t2 |t1 , p2t1 |t2 and, for each i, ti (Sj , tj ) = 1 .
In words, (p1 , p2 ) is a mixed strategy Nash equilibrium if there is mutual
belief of a profile of types, where each type induces the opponents mixed
strategy for the other, and where any pure strategy in the induced mixed
strategy is rational for the opponent type. Since any pure strategy Nash
equilibrium can be viewed as a degenerate mixed strategy Nash equilibrium, these epistemic conditions are sufficient for pure strategy Nash
equilibrium as well. Again, we need not require mutual belief of the type
profile; it is sufficient that there is mutual belief of each players belief
about the strategy choice of his opponent.
It is by no means infeasible to provide epistemic conditions for mixed
strategy Nash equilibrium, interpreted as an equilibrium in beliefs, with-
CONSISTENT PREFERENCES
1.2
This book is mainly concerned with the analysis of deductive reasoning in gamesleading to rationalizability conceptsrather than the
study of steady states where coordination problems have been solved
corresponding to equilibrium concepts. Deductive reasoning within the
consistent preferences approach means that events like [ir] will be made
subject to interactive epistemology, without assuming that there is mutual belief of the type profile.
Backward induction is a prime example of deductive reasoning in
games. To capture the backward induction procedure, one must believe that each player chooses rationally at every information set of an
extensive game, also at information sets that the players own strategy
precludes from being reached. As will be indicated through the analysis
of Chapters 710based partly on joint work with Andres Pereathis
might be easier to capture by analyzing events where each player believes that the opponent chooses rationally, rather than events where
each player actually chooses rationally. The backward induction procedure can be captured by conditions on how each player revises his
beliefs after surprising choices by the opponent. Therefore, it might
be fruitful to characterize this procedure through restrictions on the belief revision policies of the players, rather than through restrictions on
their behavior at all information sets (also at information sets that can
only be reached if the behavioral restrictions at earlier information sets
were not adhered to). As will be apparent in Chapters 710, the consistent preferences approach captures the backward induction procedure
through conditions imposed directly on the players belief revision policies.
In certain gameslike the battle-of-the-sexes with outside option
game (cf. Figure 2.6)forward induction has considerable bite. To
model forward induction, one must essentially assume that each player
Introduction
believes that any rational choice by the opponent is infinitely more likely
than any choice that is not rational. Again, this might be easier to capture by analyzing events relating to the beliefs of the player, rather than
events relating to the behavior of the opponent. Chapters 11 and 12
will report on joint work with Martin Dufwenberg that shows how the
consistent preferences approach can be used to promote the forward
induction outcome.
For ease of presentation only two-player games will be considered in
this book. This is in part a matter of convenience, as much of the subsequent analysis can essentially be generalized to n-player games (with
n > 2). In particular, this applies to the analysis of backward induction
in Chapter 7, and to some extent, the analysis of forward induction in
Chapters 11 and 12. On the other hand, in the equilibrium analysis of
Chapters 5, 8, 9, and 10, a strategy of one player is interpreted as an
expression of the belief of his opponent. This interpretation is straightforward in two-player games, but requires that the beliefs of different
opponents coincide in games with more than two playerse.g., compare
Theorems A and B of Aumann and Brandenburger (1995). Moreover,
by only considering two-player games we can avoid the issue of whether
(and if so, how) each players beliefs about the strategy choices of his
opponents are stochastically independent.
Throughout, player 1 will be referred to in the male gender (e.g.,
he chooses among his strategies), while player 2 will be referred to
in the female gender (e.g., she believes that player 1 . . . ). Also, in
the examples the strategies of player 1 will be denoted by upper case
symbols (e.g., L and R), while the strategies of player 2 will be denoted
by lower case symbols (e.g., ` and r).
1.3
CONSISTENT PREFERENCES
of beliefssee, e.g., Boge and Eisele (1979), Mertens and Zamir (1985),
Brandenburger and Dekel (1993), and Epstein and Wang (1996)yield
S1 T1 S2 T2 as the belief-complete state space, where Ti is the
set of all feasible types of player i. Furthermore, for each i, there is a
homeomorphism between Ti and the set of beliefs on Si Sj Tj .
In the decision problem of any player i, is decision is to choose one
of his own strategies. For the modeling of this problem, is belief about
his own strategy choice is not relevant and can be ignored. This does
not mean that player i is not aware of his own choice. It signifies that
such awareness plays no role in the analysis, and is thus redundant.2
Hence, in the setting of a strategic game the belief of each type of player
i can be restricted to the set of opponent strategy-type pairs, Sj Tj .
Combined with the payoff function specified by the strategic game, a
belief on Sj Tj yields preferences over player is strategies.
As discussed in Section 5.1, the above results on belief-complete
state spaces are not needed (since only finite games are treated without
belief-completeness being imposed) and not always applicable in the
setting of the present text (since some of the analysise.g. in Chapters
6, 7, 11, and 12allows for incomplete preferences). Indeed, infinite hierarchies of beliefs can be modeled by an implicit but belief-incomplete
modelwith a finite type set Ti for each player iwhere the belief of
a player corresponds to the players type, and where the belief of the
player concerns the opponents strategy-type pair.
If we let each player be aware of his own type (as we will assume
throughout), this leads to an epistemic model where the state space of
player i is Ti Sj Tj . For each player, this is a standard decisiontheoretic formulation in the tradition of Savage (1954), Anscombe and
Aumann (1963), and Blume et al. (1991a):
Player i as a decision maker is uncertain about what strategy-type
pair in Sj Tj will be realized.
Player is type ti determines his belief on Sj Tj
Player is decision is to choose a (possibly mixed) strategy pi (Si );
each such strategy determines the (randomized) outcome of the game
as a function of the opponent strategy sj Sj .3
2 Tan
Introduction
The model leads, however, to a different state space for each player,
which may perhaps be considered problematic.
In the framework for epistemic modeling of games proposed by Aumann (1987a)applied by Aumann and Brandenburger (1995) and illustrated in Section 1.1it is also explicitly modeled that each player is
aware of his own decision (i.e., his strategy choice). This entails that,
for each player i, there is function si from Ti to Si that assigns si (ti ) to
ti . Furthermore, it means that the relevant state space is T1 T2 , which
is identical for both players. In spite of its prevalence, Aumanns model
leads to the following potential problem: If player i is of type ti and in
spite of this were to choose some strategy si different from si (ti ), then
the player would no longer be of type ti (since only si (ti ) is assigned to
ti ). So what, starting with a state where player i is of type ti , would
player i believe about his opponents strategy choice if he were to choose
si 6= si (ti )?
In line with the defense by Aumann and Brandenburger (1995) on
pp. 1174-1175, one may argue that Aumanns framework is purely descriptive and contains enough information to determine whether a player
is rational and that we need not be concerned about what the player
would have believed if the state were different. An alternative is, however, to follow Board (2003) in arguing that ti s belief about his opponents strategy choice should remain unchanged in the counterfactual
event that he were to choose si 6= si (ti ).
The above discussion can be interpreted as support for the epistemic
structure that will underlie this book, and where the state space of player
i is Ti Sj Tj . This kind of epistemic model describes the factors
that are relevant for each player as a decision maker (namely, what his
opponent does and who his opponent is), while being silent about the
awareness of player i of his own decision. Also in this formulation, a
different choice by player i changes the state, as an element of S1
T1 S2 T2 , but it does not influence the type of player i, as a specific
strategy is not assigned to each type. Hence, a different choice by player
i does not change his belief about what the opponents do.
In this setting, the epistemic analysis concerns the type profile, and
not the strategy profile. As we have seen in Section 1.1, and which we
will return to in Chapter 5, this is, however, sufficient to state and prove,
e.g., a result that corresponds to Aumann and Brandenburgers (1995)
Theorem A, provided that mutual belief of rationality is weakened to
the condition that each player believes that his opponent is rational. As
we will see in Chapters 5 and 6 it also facilitates the introduction of
10
CONSISTENT PREFERENCES
caution, which then corresponds to players having beliefs that take into
account that opponents may make irrational choices, rather than players
trembling when they make their choice.
Chapters 3 and 4 are concerned with the decision-theoretic framework
and epistemic operators derived from this framework.
Chapter 3 spells out how the Anscombe-Aumann framework will be
used as a decision-theoretic foundation. Following Blume et al. (1991a),
continuity will be relaxed. Moreover, two different kinds of generalizations are presented. On the one hand, completeness will be relaxed, as
this is not an integral part of the backward induction procedure, and
cannot be imposed in the epistemic characterization of forward induction presented in Chapters 11 and 12. On the other hand, flexibility
concerning how to specify a system of conditional beliefs will be introduced, leading to a structure that encompasses both the concept of a
conditional probability system and conditionals derived from a lexicographic probability system. This flexibility turns out to be essential for
the analysis of Chapters 8 and 9.
Chapter 4 reports on joint work with Ylva Svik which derives beliefoperators from the preferences of decision makers and develop their semantics. These belief operators will in later chapters be used in the
epistemic characterizations.
First, however, motivating examples will be presented and discussed
in Chapter 2.
Chapter 2
MOTIVATING EXAMPLES
Through examples this chapter illuminates the features that distinguish the consistent preferences approach from the rational choice approach (cf. Chapter 1). The examples also illustrate issues of relevance
when capturing backward and forward induction in models of interactive
epistemology. The same examples will be revisited in later chapters.
Section 2.1 presents six different games, and contains a discussion of
how suggested outcomes in these games can be promoted by different
solution concepts. This discussion leads in Section 2.2 to an overview of
the solution concepts that will be covered in subsequent chapters. While
Section 2.1 will illustrate how various concepts work in the different
examples, Section 2.2 will relate the different concepts to each other,
and provide references to relevant literature.
2.1
Six examples
12
CONSISTENT PREFERENCES
r
`
L 3, 1 0, 0
R 0, 0 1, 3
Figure 2.1.
G1 (battle-of-the-sexes).
player believes that the opponent chooses rationally given the opponents
conjecture. The preferences of player 1that he ranks L about Ris
consistent with the preferences of player 2that she ranks ` above r, and
vice versa. More precisely, that player 1 ranks L above R is consistent
with his beliefs about player 2, namely that he believes that she ranks `
above r and she chooses rationally (i.e., chooses a top ranked strategy).
The consistent preferences interpretation of Nash equilibrium carries
over to the mixed strategy equilibrium when interpreted as an equilibrium in beliefscf. the Harsanyi (1973) interpretation discussed in Section 1.1. If player 1 believes with probability 1/4 that 2 chooses ` and
with probability 3/4 that 2 chooses r and player 2 believes with probability 3/4 that 1 chooses L and with probability 1/4 that 1 chooses
R, and these conjectures are common belief, then the players beliefs
constitute a mixed-strategy Nash equilibrium. It is a Nash equilibrium
since there is mutual belief of the conjectures about opponent choice
and each player believes that the opponent chooses rationally given the
opponents conjecture.
Rationalizability concepts have no bite in the battle-of-the-sexes
game, G1 : Interactive epistemology based on rationality alone cannot
guide the players to one of the equilibria. Hence, to illustrate the force
of deductive reasoning in gamesleading to rationalizability concepts
we must consider other examples.
In game G2 of Figure 2.2, there is a unique Nash equilibrium, (L, `).
Furthermore, deductive reasoning will readily lead player 1 to L and
player 2 to `. In the rational choice approach this works as follows:
If player 1 chooses rationally, then he chooses L. This is independent
of his conjecture about 2s behavior since L strongly dominates R (as
4 > 3 and 1 > 0). Therefore, if player 2 believes that 1 chooses rationally, and 2 chooses rationally herself, then she chooses ` (since 1 > 0).
This argument shows that L is the unique rationalizable strategy for
player 1 and ` is the unique rationalizable strategy for player 2. In the
consistent preferences approach, we get: Player 1 ranks L above R,
independently of his conjecture about 2s behavior. If player 2 believes
13
Motivating Examples
r
`
L 4, 1 1, 0
R 3, 0 0, 3
Figure 2.2.
r
`
L 1, 3 4, 2
R 1, 3 3, 5
Figure 2.3.
that 1 chooses rationally, then she believes that 1 chooses L and ranks `
above r. Therefore, if player 1 believes that 2 chooses rationally, and he
believes that she believes that 1 chooses rationally, then he believes that
2 chooses `. As we will return to in Chapters 5 and 6, this is an alternative way to establish L and ` as the players rationalizable strategies. In
any case, the deductive reasoning leading to rationalizability corresponds
to iterated elimination of strongly dominated strategies (IESDS).
In game G3 of Figure 2.3, there is also a unique Nash equilibrium,
(L, `). However, deductive reasoning is more problematic and interesting in the case of this game. For each player, both strategies are
rationalizable, meaning that rationalizability has no bite in this game.
In particular, if player 1 deems it subjectively impossible that 2 may
choose r, then R is a rational choice. Moreover, if player 2 believes that
1 chooses R, then r is a rational choice. Still, we might argue that 1
should not rule out the possibility that 2 might choose r, leading him
to rank L above R (since L weakly dominates R) and player 2 to rank
` above r. Such deductive reasoning leads to permissible strategies in
the terminology of Brandenburger (1992). Permissibility corresponds
to one round of elimination of all weakly dominated strategies followed
by iterated elimination of strongly dominated strategiesthe so-called
Dekel-Fudenberg procedure, after Dekel and Fudenberg (1990). It can
be formalized in two different ways.
On the one hand, within an analysis based on what players do, one
can postulate that players make almost rational choices by, in the spirit
of Selten (1975) and his trembling hand, assuming that mistakes are
made with (infinitely) small probability. Borgers (1994) shows how such
14
CONSISTENT PREFERENCES
r
`
Out 2, 0 2, 0
InL 1, 3 4, 2
InR 1, 3 3, 5
Figure 2.4.
1c
Out
2
0
In
2s
`
1
3
1s
L
4
2
3
5
Motivating Examples
15
16
CONSISTENT PREFERENCES
r
`
2,
2
2,
2
Out
InL 4, 1 1, 0
InR 3, 0 0, 3
Figure 2.5.
2
2
1c
@
Out
InL
`@ r
4
1
1
0
@ InR
@
2
@s
` @r
3
0
0
3
one would normally suggest, namely (InL, `). This outcome is supported
by the following deductive reasoning: Since InL strongly dominates InR,
implying that player 1 prefers the former strategy to the latter, player 2
should deem InL much more likely than InR conditional on being asked
to play, and hence prefer ` to r. This in turn would lead player 1 to
prefer InL to his two other strategies if he believes that player 2 will be
rational by choosing her top-ranked strategy `.
However, the concepts of sequential and quasi-perfect rationalizability
only preclude that player 2 unconditionally assigns positive probability
to player 1 choosing InR. If player 2 assigns probability one to player
1 choosing Out, then she maywhen revising her beliefs conditional on
being asked to playassign sufficient probability to InR so that r is
preferred to `. If player 1 assigns sufficient probability to player 2 being
of such a type, then he will prefer Out to his two other strategies.
The outcome (InL, `) can be promoted by considering the event that
player 2 respects the preferences of her opponent by deeming one opponent strategy infinitely more likely than another if the opponent prefers
the former to the latter. Respect of opponent preferences was first considered by Blume et al. (1991b) in their characterization of proper equilibrium. Being a requirement on the beliefs of players, it fits nicely into
the consistent preferences approach. Within a model of interactive
epistemology Chapter 10 characterizes the concept of proper rationalizability by considering the event that each player respects opponent
preferences. Proper rationalizability implies backward induction. However, even though it yields conclusions that coincide with IEWDS in all
of the examples above, this conclusion does not hold in general, as will
be shown by the next example and further discussed in Chapter 10.
Lastly, turn to an expanded version of G1 , namely the game G01 illustrated in Figure 2.6 with a corresponding extensive form 01 . The exten-
17
Motivating Examples
r
`
2,
2
2,
2
Out
InL 3, 1 0, 0
InR 0, 0 1, 3
1c
@
@ InR
InL
@
2
s
@s
`@ r
` @r
@
2
2
Out
3
1
0
0
0
0
1
3
2.2
To provide a structure for the concepts that will be defined and characterized in the subsequent chapters, it might be useful as a roadmap to
present an overview over these concepts and their relationships.
18
Table 2.1.
CONSISTENT PREFERENCES
Proper
equilibrium
Myerson (1978)
Strategic form
Quasi-perfect
perfect equil.
equilibrium
Selten (1975)
van Damme (1984)
Nash
Weak sequential
Sequential
equi-
equilibrium
equilibrium
librium
Reny (1992)
Kreps & Wilson (1982)
First, consider the equilibrium concepts of Table 2.1. Here, weak sequential equilibrium refers to the equilibrium conceptdefined by Reny
(1992)that results when each player only optimizes at information sets
that the players own strategy does not preclude from being reached.
Moreover, quasi-perfect equilibrium is the concept defined by van Damme
(1984) and which differs from Seltens (1975) extensive form perfect equilibrium by having each player ignore the possibility of his own future mistakes. The arrows indicate that any proper equilibrium corresponds to a
quasi-perfect equilibrium and so forth. Nash equilibrium and (strategic
form) perfect equilibrium will be characterized in Chapter 5, while sequential equilibrium, quasi-perfect equilibrium, and proper equilibrium
will be characterized in Chapters 8, 9, and 10, respectively.
The non-equilibrium analogs to these equilibrium concepts are illustrated in Table 2.2. Again, the arrows indicate that proper rationalizability implies quasi-perfect rationalizability and so forth. Of course, the
notion of rationalizability due to Bernheim (1984) and Pearce (1984) is a
non-equilibrium analog to Nash equilibrium. Likewise, the notion of permissibility due to Borgers (1994) and Brandenburger (1992) corresponds
to Seltens (1975) strategic form perfect equilibrium, and the notion of
weak sequential rationalizability due to Ben-Porath (1997)coined weak
extensive form rationalizablity by Battigalli and Bonanno (1999)is a
non-equilibrium analog of weak sequential equilibrium. Furthermore, sequential rationalizability due to Dekel et al. (1999, 2002), quasi-perfect
rationalizability due to Asheim and Perea (2004), and proper rational-
19
Motivating Examples
Table 2.2.
Common
cert. belief
that each
player . . .
. . . is cautious
and respects
preferences
. . . is cautious
. . . is not
necessarily
cautious
. . . believes the
oppon. chooses
rationally only
initially, in the
whole game
. . . believes the
oppon. chooses
rationally at
all reachable
info. sets
[n.a.]
[n.a.]
[n.a.]
Rationalizability
Bernh. (1984)
Pearce (1984)
[Chapters 56]
Does not imply
backward ind.
Permissibility
B
orgers (1994)
Brandenb. (1992)
Dek. & Fud. (1990)
[Chapters 56]
Weak sequential
rationalizability
Ben-Porath (1997)
[Chapter 8]
Does not imply
backward ind.
. . . believes the
oppon. chooses
rationally at
all info. sets
Proper
rationalizability
Schuhm. (1999)
[Chapter 10]
Quasi-perfect
rationalizability
Ash. & Per. (2004)
[Chapter 9]
Sequential
rationalizability
Dekel et al.
(1999, 2002)
[Chapter 8]
Implies
backward ind.
izability due to Schuhmacher (1999) are non-equilibrium analogs to sequential equilibrium, quasi-perfect equilibrium, and proper equilibrium,
respectively.
As indicated by Table 2.2, these concepts will be treated in Chapters
5, 6, 8, 9, and 10, and they are characterized by
on the one hand, whether each player is cautious and respects opponent preferences, and
on the other hand, whether each player believes that his opponent
chooses rationally only initially (in the whole game), or at all reachable information sets, or at all information sets.
This taxonomy defines events which are made subject to common certain
belief, where certain belief is the epistemic operator that will be used
for the interactive epistemology. This operator is defined in Chapter 4
and will have the following meaning: An event is said to be certainly
believed if the complement is deemed subjectively impossible.
20
CONSISTENT PREFERENCES
Chapter 3
DECISION-THEORETIC FRAMEWORK
22
CONSISTENT PREFERENCES
introduces the different sets of axioms that will be considered, while the
final Section 3.3 presents the corresponding representation results.
3.1
Motivation
and Aumann (1963) use the term roulette lottery for what we here call lotteries,
horse lotteries for acts from states to deterministic outcomes, i.e., acts in the Savage (1954)
sense, and compound horse lotteries for what we here refer to as Anscombe-Aumann acts.
Decision-theoretic Framework
23
argument is in line with the analysis of Aumann and Dreze (2004), who however depart from the Anscombe-Aumann framework by considering preferencesnot over all functions from states to randomized outcomesbut only on the subset of mixed strategies. The
Ascombe-Aumann framework requires that the decision maker has access to objective probabilities; however, Machina (2004) points to how this requirement can be weakened.
24
CONSISTENT PREFERENCES
25
Decision-theoretic Framework
1c
D
1
1
2s
d
1
1
Figure 3.1.
0
0
f
d
1,
1
0,
0
F
D 1, 1 1, 1
26
3.2
CONSISTENT PREFERENCES
Axioms
Decision-theoretic Framework
27
28
CONSISTENT PREFERENCES
29
Decision-theoretic Framework
Table 3.1.
Complete and
continuous
123456
Prob. distr.
Complete and
partitionally continuous
1 2 3 400 5 6
LCPS
Complete and
discontinuous
1 2 3 40 5 6
LPS
Incomplete and
discontinuous
1 2 3 4 5 60 16
CPS
1 2 3 40 5 60 16
SCLP
10 11 2 3 40 5 6
Conditionality
Dynamic
consistency
Table 3.1 illustrates the relationships between the sets of axioms that
we will consider. The arrows indicate that one set of axioms implies
another. The figure indicates what kind of representations the different
sets of axioms correspond to, as reported in the next section.
3.3
Representation results
30
CONSISTENT PREFERENCES
4 I.e.,
`=1
L|
0` (e)(q (e))
,
`=1
31
Decision-theoretic Framework
`=1
L|
0` (e)(q (e))
,
`=1
32
CONSISTENT PREFERENCES
Proposition 5 (Asheim and Perea, 2004) The following two statements are equivalent.
1 (a) satisfies Axioms 1, 2, and 4 0 if 2F \{}, and Axiom 3
if and only if , and (b) the system of conditional preferences
{ | } satisfies Axioms 5, 6 0 , and 16 .
2 There exist a vNM utility function : (Z) R and an SCLP (, `)
on F with support that satisfies, for any ,
p q iff
X
`()|
X
0` (e)(p (e))
L
e
`=1
`()|
0` (e)(q (e))
,
`=1
33
Decision-theoretic Framework
L|
0 (e)(p (e))
e `
`=1
0 (e)(q (e))
e `
L|
`=1
`|
X
0k (e)(p (e))
>L
k=1
0k (e)(q (e))
`|
k=1
`=1
`()|
0` (e)(q (e))
,
`=1
34
CONSISTENT PREFERENCES
X
e
(3.1)
35
Decision-theoretic Framework
(e)(p (e))
(e)(q (e)) ,
e
= (
then one could construct an alternative LCPS
1 , . . . ,
L ) such
min{`| supp
` 6= }, contradicting the uniqueness of .
3 implies 2. Construct the LCPS = (1 , . . . , L ) by the following
algorithm: (i) 1 = F , (ii) ` {2, . . . , L}, ` = , where =
a
L
F \`1
k=1 suppk 6= F \, and (iii) k=1 suppk = . Then, for any ,
36
CONSISTENT PREFERENCES
Chapter 4
BELIEF OPERATORS
KD45 operator satisfies that belief of an event implies that the complement is not believed,
but need not satisfy the truth axiomi.e. that a believed event is always true.
38
CONSISTENT PREFERENCES
39
Belief operators
.
&
Infinitely more likely
Admissibility
Q Accessibility relation
(R1 , . . . , RL ) Vector of nested
of epistemic priority
accessibility relations
.characterizes
defines&
Belief operators
s certain belief
s conditional belief
s robust belief
Figure 4.1.
term epistemic priority will here be used to refer to what elsewhere is sometimes
referred to as plausibility or prejudice; see, e.g., Friedman and Halpern (1995) and Lamerre
and Shoham (1994). This is similar to preference among states (or worlds) in nonmonotonic
logiccf. Shoham (1988)leading agents towards some states and away from others. In
contrast, we use the term preferences in the decision-theoretic sense of a binary relation on
the set of functions (acts) from states to outcomes.
40
CONSISTENT PREFERENCES
4.1
The purpose of this section is to show how two different kinds of accessibility relationssee, e.g., Lamerre and Shoham (1994) and Stalnaker
(1996, 1998)can be derived from preferences.
Consider the decision-theoretic framework of Chapter 3. However, as
motivated below, assume that the decision makers preferences may vary
between states. Hence, denote by d the preferences over acts on at
state d, and use superscript d throughout in a similar manner.
Assume that, for each d F , (a) d satisfies Axioms 10 , 2, and 40 if
2F \{}, and Axiom 3 if and only if d (recalling from Chapter
3 that d denotes { 2F \{}| d 6= }), and (b) the system of
conditional preferences {d | d } satisfies Axioms 5, 6, and 11. In
view of Axiom 6 we simplify notation and write
p d q instead of p dF | q p d q ,
and simplify further by substituting d for dF . By Proposition 4, d
is conditionally represented: There exist a vNM utility function d :
(Z) R such that p d{e} q iff d (p(e)) d (q(e)) whenever e d .
If E F , say that pE weakly dominates qE at d if, e E, d (pE (e))
d (qE (e)), with strict inequality for some f E. Say that d is
Belief operators
41
42
CONSISTENT PREFERENCES
43
Belief operators
d` =
[`
k=1
suppdk .
6 dR e
`
44
CONSISTENT PREFERENCES
Proposition 9 (i) dQd iff dRL d. (ii) (dQe and not eQd) iff (`
{1, . . . , L} such that dR` e and not eR` d).
If Axiom 4 is substituted for Axiom 40 so that the conditional Archimedean property is strengthened to the Archimedean propertythen e
being deemed infinitely more likely than f at d implies that f is Savagenull. Hence, L = 1, and by Definitions 2 and 3, Q = R1 . Hence, we are
left with a unique serial, transitive, and Euclidean accessibility relation
if preferences are continuous.
4.2
In line with the basic structure illustrated in Figure 4.1, we now use
the accessibility relations of Section 4.1 to define and characterize belief
operators.
Defining certain, conditional, and robust belief. Consider the
accessibility relation of epistemic priority, Q, having the properties of
Proposition 7. In Asheim and Svik (2003) we show how equivalence
classes can be derived from Q with the properties of Proposition 7, implying that Q with such properties suffices for defining the belief operators. In particular, we show that the set of states that are subjective
indistinguishable at d is given by
d = {e F | f F such that dQf and eQf } ,
and the set of states that are deemed subjectively possible at d equals
d = {e d | f F such that f Qe} = {e d | eQe} ,
where d 6= since Q is serial, and where the last equality follows since,
by quasi-backward linearity, eQe if f Qe.
Define certain belief as follows.
45
Belief operators
dE := { d | E d 6= if E d 6= } .
Hence, a non-empty set is not in E if and only if (1) there exists d F
such that d = or (2) there exists d F such that E d 6= and
E d = . Note that E is a subset of that satisfies F E ;
hence, 6= E .
Define robust belief as follows.
46
CONSISTENT PREFERENCES
Characterizing certain, conditional, and robust belief. Consider the vector of nested accessibility relations (R1 , . . . , RL ) having the
properties of Proposition 8 and being related to Q as in Proposition 9. In
Asheim and Svik (2003) we first derive (R1 , . . . , RL ) from Q and then
show how (R1 , . . . , RL ) characterizes the belief operators. In particular,
it holds for any ` {1, . . . , L} that
d = {e F | f F such that dR` f and eR` f } ,
and
d` = {e F | dR` e} .
Furthermore,
d = {e d | eRL e} = {e F | dRL e} .
The latter observations yield a characterization of certain belief.
Proposition 10 KE = {d F | dL E}.
Proposition 10 entails that certain belief as defined in Definition 4 corresponds to what Arlo-Costa and Parith (2003) call full belief.
Furthermore, by the next result, (unconditional) belief, B(F ), corresponds to what van Fraassen (1995) calls full belief.
4.3
47
Belief operators
standard for the certain and conditional belief operators, while harder
to establish for the robust belief operator. Rather, our main goal is to
show how the non-monotonic (and thus poorly behaved) robust belief
operator is bounded by the two KD45 operators certain and conditional
belief. While the results certain belief and conditional belief are included
as a background for the results on robust belief, the latter findings in
combination with the results of Sections 4.2 and 4.4 shed light on the
non-standard notions of belief recently used in epistemic analyses of
games.
Properties of certain and conditional belief. Note that certain
belief implies conditional belief since, by Definitions 4 and 5, d ()
d .
KF = F
B() =
KE KKE
B()E KB()E
KE K(KE)
B()E K(B()E).
Proposition 15 1 d () .
48
CONSISTENT PREFERENCES
2 If d 6= , then d () = d .
3 If , then d () 6= .
4 If d () 0 6= , then d ( 0 ) = d () 0 .
Properties of robust belief. It is easy to show that certain belief
implies robust belief, which in turn implies (unconditional) belief.
4.4
Belief operators
49
Definition 7 (Brandenburger and Keisler, 2002) At d the decision maker assumes E if dE is nontrivial and p dE q implies p d q.
Proposition 18 Assume that d satisfies Axioms 1 and 4 00 (in addition to the assumptions made in Section 4.1). Then E is assumed at d
iff d B 0 E.
Proposition 18 shows that the assumption operator coincides with
robust belief (and thus with Stalnakers absolutely robust belief) under
completeness and the partitional Archimedean property.
However, if the partitional Archimedean property is weakened to the
conditional Archimedean property, then this equivalence is not obtained.
To see this, let d = {d, e, f }, and let the preferences d , in addition
to the properties listed in Section 4.1, also satisfy completeness. It then
follows from Proposition 2 that a is represented by a and a LPSi.e.,
a sequence of subjective probability distributions with possibly overlapping supports. Consider the example provided by Blume et al. (1991a) in
their Section 5 of a two-level LPS, where the primary probability distribution, d1 , is given by d1 (d) = 1/2 and d1 (e) = 1/2, and the secondary
probability distribution, d2 , used to resolve ties, is given by d2 (d) = 1/2
and d2 (f ) = 1/2. Consider the acts p and q, where d (p(d)) = 2,
d (p(e)) = 0, and d (p(f )) = 0, and where d (q(d)) = 1, d (q(e)) = 1,
and d (q(f )) = 2. Even though d is admissible on {d, e}, and thus
{d, e} is robustly believed at d, it follows that {d, e} is not assumed at
d since
pd{d,e} q while pd q .
Brandenburger and Keisler (2002) do not indicate that their definition
as stated in Definition 7should be used outside the realm of preferences that satisfy the partitional Archimedean property. Hence, our
50
CONSISTENT PREFERENCES
Belief operators
51
Chapter 5
BASIC CHARACTERIZATIONS
5.1
54
CONSISTENT PREFERENCES
Basic characterizations
55
1 Preference-completeness
is needed for the interactive epistemic analyses of, e.g., Brandenburger and Keisler (2002) and Battigalli and Siniscalchi (2002), but not for the analysis
presented in this book. Brandenburger and Keisler (1999) show that there need not exist
a preference-complete interactive epistemic model when preferences are not representable
by subjective probabilities, implying that preference-completeness may be inconsistent with
the analysis of Chapters 6, 7, 11, and 12, where Axiom 1 is not imposed.
56
CONSISTENT PREFERENCES
57
Basic characterizations
is a finite strategic two-player game. Assume that, for each i, there exist
s = (s1 , s2 ), s0 = (s01 , s02 ) S such that ui (s) > ui (s0 ). The event that i
plays the game G is given by
[ui ] := {(t1 , t2 ) T1 T2 | iti z is a positive affine transformation of ui } ,
while [u] := [u1 ] [u2 ] is the event that both players play G.
Denote by pi , qi (Si ) mixed strategies for player i, and let Sj0
( Sj ) be a non-empty set of opponent strategies. Say that pi strongly
dominates qi on Sj0 if, sj Sj0 , ui (pi , sj ) > ui (qi , sj ). Say that qi is
strongly dominated on Sj0 if there exists pi (Si ) such that pi strongly
dominated qi on Sj0 . Say that pi weakly dominates qi on Sj0 if, sj Sj0 ,
ui (pi , sj ) ui (qi , sj ) with strict inequality for some s0j Sj0 . Say that qi
is weakly dominated on Sj0 if there exists pi (Si ) such that pi weakly
dominated qi on Sj0 .
The following two results will be helpful for some of the proofs.
sj Sj0
sj Sj0
sj Sj0
58
CONSISTENT PREFERENCES
derived from the epistemic model and defined for events that are subsets
of T1 T2 . For any E T1 T2 , say that player i certainly believes the
event E at ti if ti projTi Ki E, where
Ki E := {(t1 , t2 ) T1 T2 | projT1 T2 ti = {ti } Tjti E} .
Say that there is mutual certain belief of E at (t1 , t2 ) if (t1 , t2 ) KE,
where KE := K1 E K2 E. Say that there is common certain belief of E
at (t1 , t2 ) if (t1 , t2 ) CKE, where CKE := KE KKE KKKE . . . .
As established in Proposition 14, Ki corresponds to a KD45 system.
Moreover, the mutual certain belief operator, K, has the following properties, where we write K0 E := E, and for each g 1, Kg E := KKg1 E.
5.2
Consistency of preferences
t`i (sj , tj )
t`i (Sj , tj )
P
where t`i (Sj , tj ) := sj Sj t`i (sj , tj ), and where ` denotes the first level
` of ti for which t`i (Sj , tj ) > 0. Furthermore, define the set of type profiles for which ti i nduces a r ational mixed strategy for any subjectively
59
Basic characterizations
n
0 o
0
Proposition 21 Consider a finite strategic two-player game G. A profile of mixed strategies p = (p1 , p2 ) is a mixed-strategy Nash equilibrium
if and only if there exists an epistemic model with (t1 , t2 ) [u][ir] such
that (1) there is mutual certain belief of {(t1 , t2 )} at (t1 , t2 ), and (2) for
each i, pi is induced for ti by tj .
Proof. (Only if.) Let (p1 , p2 ) be a mixed-strategy Nash equilibrium.
Construct the following epistemic model. Let T1 = {t1 } and T2 = {t2 }.
Assume that, for each i,
iti satisfies that iti z = ui ,
the SCLP (ti , `ti ) has the properties that ti = (t1i , . . . , tLi ) with
support Sj {tj } satisfies that, sj Sj , t1i (sj , tj ) = pj (sj ), and `ti
satisfies that `(Sj {tj }) = 1.
Then, it is clear that (t1 , t2 ) [u], that there is mutual certain belief of
{(t1 , t2 )} at (t1 , t2 ), and that, for each i, pi is induced for ti by tj . It
60
CONSISTENT PREFERENCES
remains to show that (t1 , t2 ) [ir], i.e., for each i, pi (Siti ). Since,
by Definition 10, it holds for each i that, s0i Si , ui (pi , pj ) ui (s0i , pj ),
it follows from the construction of (ti , `ti ) that pi (Siti ).
(If.) Suppose that there exists an epistemic model with (t1 , t2 )
[u] [ir] such that there is mutual certain belief of {(t1 , t2 )} at (t1 , t2 ),
and, for each i, pi is induced for ti by tj . Then, for each i, ti is
represented by iti satisfying that iti z is a positive affine transformation
of ui and an LPS t`i = (t1i , . . . , t`i ), where sj Sj , t1i (sj , tj ) = pj (sj ),
and where ` = `(Sj Tj ) 1. Suppose, for some i and p0i (Si ),
ui (pi , pj ) < ui (p0i , pj ). Then there is some si Si with pi (si ) > 0 and
some s0i Si such that ui (si , pj ) < ui (s0i , pj ), or equivalently
X
X
t1i (sj , tj )ui (si , sj ) <
t1i (sj , tj )ui (s0i , sj ) .
sj
sj
Basic characterizations
61
While any pure strategy in the support of a rationalizable mixed strategy is itself rationalizable (due to what Pearce calls the pure strategy
property), the mixture on a set of rationalizable pure strategies need not
be rationalizable.
The following lemma is a straightforward implication of Definition 11.
Step 2: Add type ti to Ti . Assume that iti satisfies (a) and (ti , `ti )
satisfies (b) and (c). Then 1ti can be chosen so that pi (Siti ).
62
CONSISTENT PREFERENCES
Step 3: Add type tj to Tj . Assume that jtj satisfies (a) and the SCLP
(tj , `tj ) on Si (Ti {ti }) has the property that tj = (1tj , . . . , Ltj )
and since Titj Ti {ti }, (Ti {ti })(Tj {tj }) CK([u][ir]). Hence,
(t1 , t2 ) CK([u] [ir]) and pi is induced for ti by tj .
Part 2: If there exists an epistemic model with (t1 , t2 ) CK([u] [ir])
such that pi is induced for ti by tj , then pi is rationalizable.
Assume that there exists an epistemic model with (t1 , t2 ) CK([u]
6= .
[ir]) such that pi is induced for ti by tj . In particular, CK([u][ir])
S
ti
0
Let, for each i, Ti := projTi CK([u] [ir]) and Xi := ti T i0 Si . By
Proposition 20(ii), for each ti Ti0 of any player i, ti deems (sj , tj )
subjectively impossible if tj Tj \Tj0 since CK([u] [ir]) = KCK([u]
[ir]) Ki CK([u] [ir]), implying Tjti Tj0 . By the definitions of [u] and
[ir], it follows that, for each ti Ti0 of any player i, ti is represented
by iti satisfying that iti z is a positive affine transformation of ui
and an LPS t`i = (t1i , . . . , t`i ), where ` = `(Sj Tj ) 1, and where
suppt1i Xj Tj . Hence, by Lemma 4, for each ti Ti0 of any player i, if
pi (Siti ), then no strategy in the support of pi is strongly dominated
on Xj , since it follows from pi (Siti ) and suppt1i Xj Tj that,
si supppi and s0i Si ,
X X t
X X t
1i (sj , tj )ui (s0i , sj ) .
1i (sj , tj )ui (si , sj )
sj Xj tj Tj
sj Xj tj Tj
5.3
Basic characterizations
63
64
CONSISTENT PREFERENCES
Proposition 23 Consider a finite strategic two-player game G. A profile of mixed strategies p = (p1 , p2 ) is a (strategic form) perfect equilibrium if and only if there exists an epistemic model with (t1 , t2 )
[u] [ir] [cau] such that (1) there is mutual certain belief of {(t1 , t2 )}
at (t1 , t2 ), and (2) for each i, pi is induced for ti by tj .
Proof. (Only if.) Let (p1 , p2 ) be a (strategic form) perfect equilibrium. Then, by Lemma 7, (p1 , p2 ) be a mixed-strategy Nash equilibrium
and, for each i, pi is not weakly dominated. Construct the following
epistemic model. Let T1 = {t1 } and T2 = {t2 }. Assume that, for each i,
iti satisfies that iti z = ui ,
the SCLP (ti , `ti ) has the properties that ti = (t1i , t2i ) with support Sj {tj } has two levels, with the first level chosen so that,
sj Sj , t1i (sj , tj ) = pj (sj ), and the second level chosen so that
suppt2i = Sj {tj } and, s0i Si ,
X
X
t2i (sj , tj )ui (pi , sj )
t2i (sj , tj )ui (s0i , sj )
sj
sj
65
Basic characterizations
sj
A mixed strategy pi is said to be permissible if pi is not strongly dominated on Pj and not weakly dominated on Sj .
While any pure strategy in the support of a permissible mixed strategy
is itself permissible, the mixture over a set of permissible pure strategies
need not be permissible.
66
CONSISTENT PREFERENCES
Step 2: Add type ti to Ti . Assume that iti satisfies (a) and (ti , `ti )
satisfies (b) and (c). Then 1ti and 2ti can be chosen so that pi
Step 3: Add type tj to Tj . Assume that jtj satisfies (a) and the SCLP
(tj , `tj ) on Si (Ti {ti }) has the property that tj = (1tj , . . . , Ltj )
67
Basic characterizations
that pi is induced for ti by tj , and `tj satisfies that `tj (Ti {ti }) = L.
Furthermore, (Ti {ti }) (Tj {tj }) [u] [ir] [cau], and since
Titj Ti {ti }, (Ti {ti }) (Tj {tj }) CK([u] [ir] [cau]). Hence,
(t1 , t2 ) CK([u] [ir] [cau]) and pi is induced for ti by tj .
Part 2: If there exists an epistemic model with (t1 , t2 ) CK([u]
[ir] [cau]) such that pi is induced for ti by tj , then pi is permissible.
Assume that there exists an epistemic model with (t1 , t2 ) CK([u]
[ir] [cau]) such that pi is induced for ti by tj . In particular, CK([u]
[ir] [cau])
6= . Let, for each i, Ti0 := projTi CK([u] [ir] [cau]) and
S
Xi := ti T i0 Siti . By Proposition 20(ii), for each ti Ti0 of any player
i, ti deems (sj , tj ) subjectively impossible if tj Tj \Tj0 since CK([u]
[ir] [cau]) = KCK([u] [ir] [cau]) Ki CK([u] [ir] [cau]), implying
Tjti Tj0 . By the definitions of [u], [ir], and [cau], it follows that, for
each ti Ti0 of any player i, ti is represented by iti satisfying that iti z
is a positive affine transformation of ui and an LPS ti = (t1i , . . . , tLi ),
and where suppt1i Xj Tj , and where suppti = Sj Tjti . Hence,
by Lemma 4, for each ti Ti0 of any player i, if pi (Siti ), then no
strategy in the support of pi is strongly dominated on Xj , since it follows
from pi (Siti ) and suppt1i Xj Tj that, si supppi and s0i Si ,
X X t
X X t
1i (sj , tj )ui (s0i , sj ) .
1i (sj , tj )ui (si , sj )
sj Xj tj Tj
sj Xj tj Tj
ti by tj , pi , satisfies pi (Siti ), it follows that pi is not strongly dominated on Xj Pj and pi is not weakly dominated on Sj . By Definition
13 this implies that pi is a permissible mixed strategy.
Chapter 6
RELAXING COMPLETENESS
In the previous chapter, we have presented epistemic characterizations of rationalizability and permissibility. For these non-equilibrium
deductive concepts, we have used, respectively, IESDS and the DekelFudenberg procedure (one round of weak elimination followed by iterated
strong domination) as the primitive definitions. Neither of these procedures rely on players having subjective probabilities over the strategy
choice of the opponent. In contrast, the epistemic characterizationsby
relying on Assumption 1require that players have complete preferences
that are representable by means of subjective probabilities.
In this chapter we show how rationalizability and permissibility can be
epistemically characterized without requiring that players have complete
preferences that are representable by means of subjective probabilities.
The resulting structure will also be used for the epistemic analysis of
backward induction in Chapter 7 and forward induction in Chapter 11.
Hence, even though the results of the present chapter may have limited
interest in their own right, they set the stage for later analysis.
6.1
70
CONSISTENT PREFERENCES
71
Relaxing completeness
j Tj
j Tj
at ti ,
and p ti q if and only if iti (p(sj , tj ))) = iti (q(sj , tj ))) for all (sj , tj )
projSj Tj i . Since a mixed strategy qi may be weakly dominated by
a pure strategy si that does not weakly dominate any pure strategy
in the support of qi , this illustrates the possibility that a non-maximal
mixed-strategy qi is supported by maximal pure strategies.
The event that player i is rational is defined by
[rati ] := {(s1 , t1 , s2 , t2 ) S1 T1 S2 T2 | si Siti } .
A strategic game. As before, G = (S1 , S2 , u1 , u2 ) denotes a finite
strategic two-player game, where S = S1 S2 is the set of strategy
profiles and, for each i, ui : S R is a vNM utility function that
assigns payoff to any strategy profile. Assume that, for each i, there
exist s = (s1 , s2 ), s0 = (s01 , s02 ) S such that ui (s) > ui (s0 ). As in
Chapter 5but transferred to S1 T1 S2 T2 spacethe event that
72
CONSISTENT PREFERENCES
73
Relaxing completeness
6.2
74
CONSISTENT PREFERENCES
Assume that there exists an epistemic model with si Siti for some
(t1 , t2 ) projT1 T2 CKC. InSparticular, CKC 6= . Let, for each i,
Ti0 := projTi CKC and Xi := ti T i0 Siti . It is sufficient to show that, for
each i, Xi Ri . By Proposition 25(ii), for each ti Ti0 of any player
i, ti ti {ti } Sj Tj0 since CKC = KCKC Ki CKC. By the
definition of C, it follows that, for each ti Ti0 of any player i,
1. ti is conditionally represented by iti satisfying that iti z is a
positive affine transformation of ui , and
75
Relaxing completeness
6.3
76
CONSISTENT PREFERENCES
Proposition 27 A pure strategy si for i is permissible in a finite strategic two-player game G if and only if there exists an epistemic model with
si Siti for some (t1 , t2 ) projT1 T2 CKA.
To prove Proposition 27, it is helpful to establish a variant of Lemma
8. Define, for any ( 6=) Yj Sj ,
Di (Yj ) := {si Si | pi (Si ) such that
pi weakly dominates si on Yj or Sj } ,
and write, for any ( 6=) X = X1 X2 S1 S2 , a(X) := a1 (X2 )
a2 (X1 ), where
ai (Xj ) := {si Si | ( 6=) Yj Xj such that si Si \Di (Yi )} .
Relaxing completeness
77
Proof of Proposition 27. Part 1: If si is permissible, then there exists an epistemic model with si Siti for some (t1 , t2 ) projT1 T2 CKA.
It is sufficient to construct a belief system with S1 T1 S2 T2
CKA such that, for each si Pi of any player i, there exists ti Ti
with si Siti . Construct a belief system with, for each i, a bijection
si : Ti Pi from the set of types to the the set of permissible pure
strategies. By Lemma 10(i) we have that, for each ti Ti of any player
i, there exists Yjti Pi such that si (ti ) Si \Di (Yjti ). Determine the
set of opponent types that ti deems subjectively possible as follows:
Tjti = {tj Tj | sj (tj ) Yjti }. Let, for each ti Ti of any player i, ti
satisfy
1. iti z = ui (so that S1 T1 S2 T2 [u]), and
2. p ti q iff pEj weakly dominates qEj for Ej = Ejti := {(sj , tj )|sj =
sj (tj ) and tj Tjti } or Ej = Sj Tjti , which implies that ti =
{ti }Ejti and ti = {ti }Sj Tjti (so that S1 T1 S2 T2 [cau]).
By the construction of Ejti , this means that Siti = Si \Di (Yjti ) 3 si (ti )
since, for any acts p and q on Sj Tj satisfying that there exist mixed
strategies pi , qi (Si ) such that, (sj , tj ) Sj Tj , p(sj , tj ) = z(pi , sj )
and q(sj , tj ) = z(qi , sj ), p ti q iff pEj weakly dominates qEj for Ej =
Yjti Tj or Ej = Sj Tj . This in turn implies, for each ti Ti any
player i,
3. ti projTi Sj Tj [ratj ] (so that S1 T1 S2 T2 Bi [ratj ]
Bj [rati ]).
Furthermore, S1 T1 S2 T2 CKA since Tjti Tj for each ti Ti
of any player i. Since, for each player i, si is onto Pi , it follows that, for
each si Pi of any player i, there exists ti Ti with si Siti .
Assume that there exists an epistemic model with si Siti for some
(t1 , t2 ) projT1 T2 CKA. InSparticular, CKA 6= . Let, for each i,
Ti0 := projTi CKA and Xi := ti T i0 Siti . It is sufficient to show that, for
each i, Xi Pi . By Proposition 25(ii), for each ti Ti0 of any player
i, ti ti {ti } Sj Tj0 since CKA = KCKA Ki CKA. By the
definition of A, it follows that, for each ti Ti0 of any player i,
1. ti is conditionally represented by iti satisfying that iti z is a
positive affine transformation of ui , and
78
CONSISTENT PREFERENCES
Chapter 7
BACKWARD INDUCTION
80
CONSISTENT PREFERENCES
1 Among
contributions that are not otherwise referred to in this chapter are Basu (1990),
Bicchieri (1989), Binmore (1987, 1995), Bonanno (1991, 2001), Clausing and Wilks (2000),
Dufwenberg and Lind
en (1996) Feinberg (2004a), Gul (1997), Kaneko (1999), Rabinowicz
(1997), and Rosenthal (1981).
Backward induction
81
82
CONSISTENT PREFERENCES
7.1
2 For
definitions of the certain belief operator Ki and the belief operator Bi in the current
context, see Section 6.1.
Backward induction
83
84
CONSISTENT PREFERENCES
Hence, for each type ti of any player i, player is conditional preferences at ti in subgame h, thi , is a reflexive and transitive binary relation on acts from Sj (h) Tj to (Z) that is conditionally represented
by a vNM utility function iti if h H ti . Since each mixed strategy
pi (Si (h)) is a function that assigns the randomized outcome z(pi , sj )
to any (sj , tj ) Sj (h) Tj and is thus an act from Sj (h) Tj to (Z),
we have that thi determines reflexive and transitive preferences on is
set of mixed strategies, (Si ).
Player is choice function at ti is a function Siti () that assigns to every
h H player is set of maximal pure strategies at ti in subgame h:
Siti (h) := {si Si (h)| @pi (Si (h)), pi thi si } .
Hence, a pure strategy, si , is in the set determined by is choice function
at ti in subgame h if there is no mixed strategy in (Si (h)) that is strictly
preferred to si given is (possibly incomplete) conditional preferences at
ti in subgame h. Refer to Siti (h) as player is choice set at ti in subgame
h, and write Siti = Siti (), thereby following the notation of Chapter 6.
Since thi is reflexive and transitive and satisfies objective independence, and Si (h) is finite, it follows that the choice set Siti (h) is nonempty and supports any maximal mixed strategies: If qi (Si (h)) and
@pi (Si (h)) such that pi thi qi , then qi (Siti (h)).
By the following lemma, if si is maximal at ti in subgame h, then si
is maximal at ti in any later subgame that si is consistent with.
85
Backward induction
86
CONSISTENT PREFERENCES
while [u] := [u1 ] [u2 ] is the event that both players play G.
Conditional belief. As before, say that E S1 T1 S2 T2 does
not concern player is strategy choice if E = Si projTi Sj Sj E. If E
does not concern player is strategy choice and h is deemed subjectively
possible by i at ti (i.e., h H ti ), say that player i at ti believes the event
E conditional on subgame h if ti projTi Bi (h)E, where
Bi (h)E := {(s1 , t1 , s2 , t2 ) S1 T1 S2 T2 | ` {1, . . . , L}
such that 6= t`i (Ti Sj (h) Tj ) projTi Sj Tj E} ,
and (t1i , . . . , tLi ) is the vector of nested sets on which ti is admissible.
By writing, for each h H ti , ti (h) := t`i (Ti Sj (h) Tj ), where
` := min{k {1, . . . , L}| tki (Ti Sj (h) Tj ) 6= }, we have that
Bi (h)E = {(s1 , t1 , s2 , t2 ) S1 T1 S2 T2 | ti (h) projTi Sj Tj E} .
It follows from the analysis of Chapter 4 that, for each h H ti , thi is
admissible on ti (h), and there is no smaller subset of {ti } Sj (h) Tj
on which thi is admissible.4
The collection of sets { ti (h)| h H ti } is a system of conditional
filter generating sets as defined in Section 5 of Brandenburger (1998).
Although completeness of preferences is not imposed under Assumption
2, ti may encode more information about is preferences at ti that what
is recoverable from such a system of conditional filter generating sets.
It follows from the full support restriction imposed by considering
players of types in projT1 T2 [cau] (cf. the definition of [cau] in Section
6.3) that ti has full support on Sj , implying in turn that H ti = H
and, at ti , is belief conditional on the subgame h is well-defined (in
the sense that the non-empty set iti (h) is uniquely determined) for all
h H. Hence, a well-defined belief conditional on h is implied by full
support alone; it does not require that h is actually being reached. This
means that a requirement on is belief conditional on the subgame h is
a requirement on the preferences (the type) of player i only; it does not
impose that i makes a strategy choice consistent with h.
Since the conditional belief operator is used only for objectively knowable events that are subjectively possible, we do not consider hypothetical events. Hence, hypothetical epistemic operators of the kind developed by Samet (1996) are not needed in the present framework.
4 The
Backward induction
7.2
87
(1995) uses the term substantive rationality, meaning that for all histories h, if a
player were to reach h, then the player would choose rationally at h. See Aumann (1995, pp.
1416) and Aumann (1998) as well as Halpern (2001) and Stalnaker (1998, Section 5).
88
CONSISTENT PREFERENCES
89
Backward induction
Table 7.1.
t01 :
t02 :
`
r
Out
InL
InR
0
00
4 t27 t21
10
0,
5 , 10
1 1
1
,
0, 10
5 10
t001 :
0
1t11
2 , 14
0, 81
0, 8
t002 :
00
t11
8
0,
1 1
,
2
14
0, 8
`
r
0
00
3 t25 t21
10
5 , 10
0,
2 3
1
0, 10
,
5 10
0
Out
InL
InR
t11
1, 12
0, 41
0, 4
t001
(0, 0)
(0, 0)
(0, 0)
7.3
90
CONSISTENT PREFERENCES
B
(h)[rat
(h)]
[caui ]
i
j
t
hH
is the event that player i believes in each subgame h that the opponent
j is rational in h.6
Consider a finite extensive two-player game of almost perfect information with corresponding strategic game G. Say that at ti player
is preferences over his strategies are admissibly subgame consistent with
the game and the preferences of his opponent if ti projTi Ai , where
\
Ai := [ui ]
B
(h)[rat
(h)]
[caui ] .
i
j
t
hH
6 Note
that the requirement of such belief in each subgame of opponent rationality allows
a player to update his belief about the type of his opponent. Hence, there is no assumption
of epistemic independence between different agents in the sense of Stalnaker (1998); cf.
the remark after the proof of Proposition 28 as well as Section 7.4. Still, the requirement
can be considered a non-inductive analog to forward knowledge of rationality as defined by
Balkenborg and Winter (1997), and it is related to the requirement in Section 5 of Samet
(1996) that each player hypothesizes that if h were reached, then the opponent would behave
rationally at h.
Backward induction
91
92
CONSISTENT PREFERENCES
tj (h),
Hence, if sj Sj
then sj is consistent with the backward induction outcome in any subgame (h, a) immediately succeeding h. Part
2. Consider i with a non-singleton action set at h; since has perfect
g
information, there is at most one such i. Let
Ti K A . The
T ti proj
t
j
preceding argument implies that Sj (h) a Sj (z(s |(h,a) )) whenever
tj Tjti since ti projTi Kg A projTi Ki Kg1 A . Let si Si (h) be a
strategy that differs from si |h by assigning a different action at h (i.e.,
z(si , sj |h ) 6= z(s |h ) and si (h0 ) = si |h (h0 ) whenever Si (h) Si (h0 )).
Let p and q be acts on Sj Tj satisfying that, (sj , tj ) Sj Tj ,
p(sj , tj ) = z(si , sj ) and q(sj , tj ) = z(si , sj ). Then,
pa Sj (z(p|(h,a) ))Tj
by backward induction
since is generic and ti projTi Kg A [ui ].
T
Since Sjtj (h) a Sj (z(s |(h,a) )) whenever tj Tj ti , it follows that,
tj Tjti ,
pSjtj (h){tj }
93
Backward induction
1c
Out
2
0
In
Figure 7.1.
Table 7.2.
t01 :
`
r`0
rr 0
t02 :
Out
InL
InR
2s
`
1
3
1s
2s
L
4
2
`0
3
5
6
4
r0
t02
4 7
, ,
5 10
1
0, 10
,
0, 0,
7
12
1
12
1
12
t01
1 1
, ,
2 3
0, 16 ,
0, 0,
1
4
1
8
1
8
t001 :
t002
1
0, 10 ,
1 1
, ,
5 10
0, 0,
t001
0, 16 ,
1 1
, ,
2 3
0, 0,
1
12
1
12
1
12
1
8
1
4
1
8
`
r`0
rr0
t000
1
(0, 0, 0)
(0, 0, 0)
(0, 0, 0)
t02
3 5
, ,
5 10
1
0, 10
,
0, 0,
5
12
1
12
1
12
t002 :
Out
InL
InR
t002
1
0, 10 ,
2 3
, ,
5 10
0, 0,
t000
1 :
1
12
3
12
1
12
t01
1, 21 , 13
0, 41 , 16
0, 0, 61
`
r`0
rr 0
t001
(0, 0, 0)
(0, 0, 0)
(0, 0, 0)
t02
1
10
1
10
3
10
t002
1
10
1
10
3
10
t000
1
1
0, 0, 12
1
0, 0, 12
1 1
0, 4 , 6
0 00
0
opponent is not of type t000
1 . Therefore, KA = A = S {t1 , t1 } {t2 },
while KKA = . Hence, preferences that yield maximal strategies in
contradiction with backward induction are not consistent with common
certain belief of admissible subgame consistency.
The example shows that ti projTi Ai is consistent with player i at ti
updating his beliefs about the preferences of his opponent conditional on
a subgame being reached. I.e., 1 at t01 assigns initially, in the whole, (primary) probability 45 to 2 being of type t02 with preferences ` r`0 rr0 ,
94
CONSISTENT PREFERENCES
while in the subgame defined by 1s second decision node 1 at t01 assigns (primary) probability one to 2 being of type t002 with preferences
r`0 ` rr. This shows that Stalnakers (1998) assumption of epistemic independence is not made; a player is in principle allowed to learn
about the type of his opponent on the basis of previous play. However,
in an epistemic model with CKA 6= , ti projTi CKA implies that 1
certainly believes at ti that 2 is of a type with preferences ` r`0 rr0 .
In other words, if there is common certain belief of admissible subgame
consistency, there is essentially nothing to learn about the opponent.
tj
and
T si |h Si (h). Hence, since likewise sj |h Sj (h), we have that (2)
hH ti Bi (h)[ratj (h)] = S1 T1 S2 T2 . As (1) and (2) hold for both
players, it follows that CKA = A = S1 T1 S2 T2 6= .
7.4
Discussion
Backward induction
95
impossible that the opponent is of a type with preferences not in accordance with backward induction.
However, since admissible subgame consistency is imposed on preferences, reaching 2s decision node and 1s second decision node in the
centipede game of Figure 2.4 does not contradict common certain belief of admissible subgame consistency. Of course, these decision nodes
will not be reached if players choose rationally. But that players satisfy
belief in each subgame of opponent rationality is not a requirement
concerning whether their own choice is rational; rather, it means that
they believe (with probability one) in any subgame that their opponent
will choose rationally. Combined with the assumption that all types
are in projT1 T2 [cau], which entails that each player deems any opponent strategy subjectively possible, this means that belief revision is
well-defined.
Hence, on the one hand, we capture the spirit of a conclusion that
can be drawn from Aumanns (1995) analysis, namely that when being
made subject to epistemic modeling backward induction corresponds to
each player having knowledge (or being certain) of some essential feature
of the opponent. In Aumanns case, each player deems it impossible
under common (true) knowledge of (sequential) rationalitythat the
opponent makes an action inconsistent with backward induction. The
analogous result in the present case is that each player deems it subjectivly impossibleunder common certain belief of admissible subgame
consistencythat the opponent has preferences not in accordance with
backward induction.
On the other hand, we are still able to present an explicit analysis of
how players revise their beliefs about the opponents subsequent choice
if surprising actions were to be made. As noted in the introduction to
this chapter, this fundamental issue of belief revision cannot formally be
raised within Aumanns framework.
Stalnaker (1998) arguescontrary to statements made by Aumann
(1995, Section 5f)that an assumption of belief revision is implicit in
Aumanns motivation, namely that information about different agents
of the opponent is treated as epistemically independent. In the reformulation by Halpern (2001),7 this means that in a state closest to the
current state when a player learns that the opponent has not followed
7 See
Halpern (2001) for an instructive discussion of the differences between Aumann (1995)
and Stalnaker (1998), as well as how these relate to Samet (1996).
96
CONSISTENT PREFERENCES
her strategy, he believes that the opponent will follow her strategy in
the remaining subgame.
There is no assumption of epistemic independence in the current interpretation of Aumanns result. Instead, we have changed statements
about opponents from being concerned with strategy choice to being
related to preferences. While it is desirable when modeling backward
induction to have an explicit theory of revision of beliefs about opponent choice, a theory of revision of beliefs about opponent preferences is
inconsistent with maintaining both (a) that preferences are necessarily
revealed from choice, and (b) that there is common certain belief of the
game being played (i.e., consider the case where Ai () is non-singleton,
and ai Ai () ends the game and leads to an outcome that is preferred by i to any other outcome). Here we have kept the assumption
that there is common certain belief of the game, meaning that the game
is of complete information, while requiring only conditional belief in
each subgame of opponent rationality, meaning that irrational opponent
choicesalthough being probability zero eventsare not subjectively
impossible.
We have shown how common certain belief of admissible subgame
consistency implies that each player deems it impossible that the opponent has preferences not in accordance with backward induction and
thus interprets any deviation from the backward induction path as the
opponent not having made a rational choice. In this way we present a
model that combines a result that resembles Aumann (1995) by associating backward induction with certainty about opponent type, with an
analysis that unlike Aumanns yields a theory of belief revision about
opponent choice.
Rationality orderings. The constructive proof of Proposition 29
shows how common certain belief of admissible subgame rationality may
lead player i at ti to have preferences over is strategies that are represented by a vNM utility function iti satisfying iti z = ui and an
LPS ti = (t1i , ..., tLi ) L(Sj Tj ) with more than two levels of subjective probability distributions (i.e., L > 2). E.g., in the centipede
game of Figure 2.4, common certain belief of admissible subgame consistency implies that player 2 at any type t2 has preferences that can
be represented by 2t2 satisfying 2t2 z = u2 and t2 = (t12 , t22 , t32 )
satisfying projS1 suppt12 = {Out}, projS1 suppt22 = {Out, InL}, and
projS1 suppt32 = S1 . One may interpret
projSj suppt1i to be js most rational strategies,
97
Backward induction
S
projSj supptLi \ k<L projSj supptki to be js completely irrational
strategies, and
S
projSj suppt`i \ k<` projSj supptki , for ` = 2, . . . , L 1, to consist of
strategies for j that are at intermediate degrees of rationality.
This illustrates that
[
projSj suppt1i , . . . , projSj supptLi \
k<L
projSj supptki
11 will, following Asheim and Dufwenberg (2003a), demonstrate how the concept
of admissible consistency can be strengthened so that the forward induction outcome is
promoted in the battle-of-the-sexes with an outside option game.
Chapter 8
SEQUENTIALITY
100
CONSISTENT PREFERENCES
nent has about the players own action choice. However, by assuming
that each player is certain of the beliefs that the opponent has about
the players own action choice, we obtain an epistemic characterization
of the corresponding equilibrium concept: sequential equilibrium. When
applied to generic games with perfect information, sequential rationalizability yields the backward induction procedure. As elsewhere, to avoid
the issue of whether (and if so, how) each players beliefs about the
action choice of his opponents are stochastically independent, all analysis is limited to two-player games. The assumption is essential in the
present context where a behavior strategy of a player will be interpreted
as an expression of the belief of his opponent.
For the above mentioned definitions and characterizations, we must
describe what a player believes both conditional on reaching his own
information sets (to evaluate his rationality) and conditional on his opponent reaching her information sets (to determine his beliefs about her
choices). Hence, we must specify a system of conditional beliefs for each
player. For reasons given in Section 3.1, this will be done by means of our
concept of a system of conditional lexicographic probabilities (SCLP) as
defined in Definition 1 and characterized in Proposition 5.
We embed the notion of an SCLP in an epistemic model, as defined
by Definition 9 of Chapter 5, by invoking Assumption 1. For each type ti
of any player i, ti is described by an SCLP, inducing a behavior strategy
for each opponent type tj that is deemed subjectively possible by ti . The
event that player i believes that the opponent j chooses rationally at
each information set can then be defined as the event where player i is
of a type ti that, for each subjectively possible opponent type tj , induces
a behavior strategy which is sequentially rational given tj s own SCLP.
The characterization of sequential equilibrium reported in Proposition
30 is included in order to motivate the analogous non-equilibrium concept, namely sequential rationalizability. The result may, however, be
of interest in its own right and in comparison with other such epistemic
characterizations; see, e.g., Theorem 2 of Feinberg (2004b).
The concept of sequential rationalizability as stated in Definition 15
is related to various other concepts proposed in the literature. Already
in Bernheim (1984) there are suggestions concerning how to define nonequilibrium concepts that involve rational choice at all information sets.
By requiring rationalizability in every subgame, Bernheim defines the
concept of subgame rationalizabilitywhich coincides with our definition
of sequential rationalizability for games of almost perfect information
Sequentiality
101
8.1
102
CONSISTENT PREFERENCES
player i information sets, i |h coincides with i . Say that i is outcomeequivalent to a mixed strategy pi ( (Si )) if, for any sj Sj , i and pi
induce the same probability distribution over terminal nodes. For any
h Hi , i |h is outcome-equivalent to some pi (Si (h)).
Epistemic modeling. Since the extensive game form determines a
finite strategic game form, we may represent the strategic interaction by
means of an epistemic model as defined by Definition 9 of Chapter 5.
Since a behavior strategy of a player will be interpreted as an expression
of the belief of his opponent, it is essential that the analysis assumes
complete preferences. Hence, the epistemic model is combined with
Assumption 1 of Chapter 5.
Under Assumption 1 it follows from Proposition 5 that, for each type
ti of any player i, is system of conditional preferences at ti can be
represented by a vNM utility function iti : (Z) R and an SCLP
(ti , `ti ), which for expositional simplicity is defined on Sj Tj with
support Sj Tjti (instead of being defined on Ti Sj Tj with support
ti = {ti } Sj Tjti ). Hence, writing thi for player is preferences
at ti conditional on player i information set h Hi being reached, we
consider w.l.o.g. thi to be preferences over acts from Sj (h) Tj to (Z)
(instead of acts from {ti } Sj (h) Tj to (Z)).
Conditional preferences over strategies. It follows that, for each
ti of any player i and all h Hi , is conditional preferences at ti in
subgame h can be represented by the vNM utility function iti : (Z)
R that does not depend on h, and an LPS
i
t`(S
|
= (01 , . . . 0`(Sj (h)Tj )|Sj (h)Tj )
j (h)Tj ) Sj (h)Tj
103
Sequentiality
104
CONSISTENT PREFERENCES
8.2
Sequential consistency
where ` is the first level ` of ti for which t`i (Sj (h), tj ) > 0, implying that t`i restricted to Sj (h) {tj } is proportional to the top
level probability distribution of the LPS that describes
ti s conditional
P
ti
ti
belief on Sj (h) {t
}.
Here,
(S
(h),
t
)
:=
j
j
sj Sj (h) ` (sj , tj ) and
`
Pj
ti
ti
` (Sj (h, a), tj ) := sj Sj (h,a) ` (sj , tj ).
Say that the behavior strategy i is sequentially rational for i at ti if,
h Hi , i |h is outcome-equivalent to some mixed strategy in (Siti (h)).
Define the event that player i is of a type that i nduces a sequentially
r ational behavior strategy for any opponent type that is deemed subjectively possible:
[isri ] := {(t1 , t2 ) T1 T2 | t0j Tjti ,
0
105
Sequentiality
Definition 14 An assessment (, ) = ((1 , 2 ), (1 , 2 )) is a sequential equilibrium if it is consistent and it satisfies that for each i and every
h Hi ,
ui (i , j ; i )|h = max
ui (i0 , j ; i )|h .
0
i
Proposition 30 Consider a finite extensive two-player game . A profile of behavior strategies = (1 , 2 ) can be extended to a sequential
equilibrium if and only if there exists an epistemic model with (t1 , t2 )
[u] [isr] such that (1) there is mutual certain belief of {(t1 , t2 )} at
(t1 , t2 ), and (2) for each i, i is induced for ti by tj .
For the if part, it is sufficient that there is mutual certain belief of
the beliefs that each player has about the action choice of his opponent
at each of her information sets. We do not need the stronger condition
that (1) entails. Hence, higher order certain belief plays no role in the
characterization, in line with the fundamental insights of Aumann and
Brandenburger (1995).
106
CONSISTENT PREFERENCES
107
Sequentiality
8.3
In the previous section we have shown how imposing that each player
believes that the opponent chooses rationally at all her information sets
can be used to characterize sequential equilibrium and define sequential
rationalizability. Table 2.2 suggests the following claim: Imposing that
each player believes that the opponent chooses rationally only at her
reachable information sets can be used to characterize the notion of weak
sequential rationalizability, due to Ben-Porath (1997) and coined weak
extensive form rationalizablity by Battigalli and Bonanno (1999). In
this section we verify this claim and shed light on the difference between
sequentiality and weak sequentiality.
Inducing weak sequential rationality. Recall from Chapter 5 that
the mixed strategy pjti |tj is induced for tj by ti if tj Tjti and, for all
sj Sj ,
ti (sj , tj )
pjti |tj (sj ) = t`i
,
` (Sj , tj )
where ` is the first level ` of ti for which t`i (Sj , tj ) > 0.
Say that a mixed strategy pi is weak sequentially rational for i at ti
if, h Hi s.t. supppi Si (h) 6= , supppi Si (h) Siti (h), and define
the event that player i is of a type that i nduces a w eakly sequentially
r ational mixed strategy for any opponent type that is deemed subjectively possible:
[iwri ] := {(t1 , t2 ) T1 T2 | t0j Tjti ,
0
108
CONSISTENT PREFERENCES
Definition 16 Let be a finite extensive two-player game. Consider the sequence defined by X(0) = S1 S2 and, g 1, X(g) =
b(X(g 1)). A pure strategy si is said to be weak sequentially rational-
109
Sequentiality
izable if
si Wi :=
\
g=0
Xi (g) .
Proposition 31 A mixed strategy pi for i is weak sequentially rationalizable in a finite extensive two-player game if and only if there exists
an epistemic model with (t1 , t2 ) CK([u] [iwr]) such that pi is induced
for ti by tj .
Proof. Part 1: If pi is weak sequentially rationalizable, then there
exists an epistemic model with (t1 , t2 ) CK([u] [iwr]) such that pi is
induced for ti by tj .
Step 1: Construct an epistemic model with T1 T2 CK([u] [iwr])
such that for each si Wi of any player i, there exists ti Ti with,
si Siti . Construct an epistemic model with, for each i, a bijection
si : Ti Wi from the set of types to the the set of weak sequentially
rationalizable pure strategies. Assume that, for each ti Ti of any player
i, iti satisfies that
(a) iti z = ui (so that T1 T2 [u]),
and the SCLP (ti , `ti ) on Sj Tj has the properties that
(b) ti = (t1i , . . . , tLi ) with support Sj Tjti satisfies that suppt11
(Sj {tj }) = {(sj (tj ), tj )} for all tj Tjti (so that, tj Tjti ,
piti |tj (sj (tj )) = 1),
(c) Ej Sj Tj such that Ej (Sj Tjti ) 6= , `ti (Ej ) = min{`| suppt`i 6=
} (so that, by Corollary 1, the SCLP corresponds to a CPS).
110
CONSISTENT PREFERENCES
Step 2: Add type ti to Ti . Assume that iti satisfies (a) and (ti , `ti )
satisfies (b) and (c). Then 1ti can be chosen so that pi (Siti ), and
Step 3: Add type tj to Tj . Assume that jtj satisfies (a) and the SCLP
(tj , `tj ) on Si (Ti {ti }) has the property that tj = (1tj , . . . , Ltj )
[iwr], and since Titj Ti {ti }, (Ti {ti })(Tj {tj }) CK([u][iwr]).
Hence, (t1 , t2 ) CK([u] [iwr]) and pi is induced for ti by tj .
Part 2: If there exists an epistemic model with (t1 , t2 ) CK([u]
[iwr]) such that pi is induced for ti by tj , then pi is weak sequentially
rationalizable.
Assume that there exists an epistemic model with (t1 , t2 ) CK([u]
[iwr]) such that pi is induced for ti by tj . In particular, CK([u][iwr]) 6=
. Let, for each i, Ti0 := projTi CK([u] [iwr]) and
[
Xi :=
{si Si |h Hi s.t. Si (h) 3 si , si Siti (h)} .
0
ti Ti
111
Sequentiality
2c
d
1
1
1s
D
0
0
Figure 8.1.
3
3
f
d
1,
1
0,
0
D
F 1, 1 3, 3
sj Xj tj Tj
112
CONSISTENT PREFERENCES
1c
D
2
2
2s
d
1
1
Figure 8.2.
1s
D
0
0
3
3
f
d
D 2, 2 2, 2
FD 1, 1 0, 0
FF 1, 1 3, 3
1 To
113
Sequentiality
8.4
114
CONSISTENT PREFERENCES
= j (h0 )(a0 ) ,
where ` is the first level ` of ti for which t`i (Sj (h0 ), t0j ) > 0. Since
is generic, i is sequentially rational for ti only if i (h) = i (h). Since
(t1 , t2 ) [ui ] [isrj ] and j takes no action at h, it follows from the
premise that |h is outcome-equivalent to |h .
Since sequentially rationalizable strategies always exist, there is an
epistemic model with (t1 , t2 ) CK([u] [isr]), implying that the result
of Proposition 33 is not empty.
Chapter 9
QUASI-PERFECTNESS
116
CONSISTENT PREFERENCES
9.1
Quasi-perfect consistency
117
Quasi-perfectness
Say that at ti player is preferences over his strategies are quasiperfectly consistent with the game and the preferences of his opponent,
if ti projTi ([ui ] [isri ] [caui ]). Refer to [u] [isr] [cau] as the event
of quasi-perfect consistency.
Characterizing quasi-perfect equilibrium. We now characterize
the concept of a quasi-perfect equilibrium as profiles of induced behavior
strategies at a type profile in [u] [isr] [cau] where there is mutual
certain belief of the type profile (i.e., for each player, only the true
opponent type is deemed subjectively possible). To state the definition of
quasi-perfect equilibrium, we need some preliminary definitions. Define
the concepts of a behavior representation of a mixed strategy and the
mixed representation of a behavior strategy in the standard way, cf., e.g.,
p. 159 of Myerson (1991). If a behavior strategy j and a mixed strategy
pj are both completely mixed, and j is a behavior representation of pj
or pj is the mixed representation of j , then, h Hj , a A(h),
j (h)(a) =
Definition 17 A behavior strategy profile = (1 , 2 ) is a quasiperfect equilibrium if there is a sequence ((n))nN of completely mixed
behavior strategy profiles converging to such that for each i and every
n N and h Hi ,
ui (i , j (n))|h = max
ui (i0 , j (n))|h .
0
i
Proposition 34 Consider a finite extensive two-player game . A profile of behavior strategies = (1 , 2 ) is a quasi-perfect equilibrium if and
only if there exists an epistemic model with (t1 , t2 ) [u] [isr] [cau]
such that (1) there is mutual certain belief of {(t1 , t2 )} at (t1 , t2 ), and
(2) for each i, i is induced for ti by tj .
118
CONSISTENT PREFERENCES
As for Proposition 31, higher order certain belief plays no role in this
characterization.
Defining quasi-perfect rationalizability. We next define the concept of quasi-perfectly rationalizable behavior strategies as induced behavior strategies under common certain belief of [u] [isr] [cau].
Definition 18 A behavior strategy i for i is quasi-perfectly rationalizable in a finite extensive two-player game if there exists an epistemic
model with (t1 , t2 ) CK([u] [isr] [cau]) such that i is induced for
ti by tj .
It follows from Proposition 34 that a behavior strategy is quasi-perfectly
rationalizable if it is part of a quasi-perfect equilibrium. Since a quasiperfect equilibrium always exists, we obtain as an immediate consequence that quasi-perfectly rationalizable behavior strategies always exist.
Propositions 30 and 34 imply the well-known result that every quasiperfect equilibrium can be extended to a sequential equilibrium, while
Definitions 15 and 18 imply that the set of quasi-perfectly rationalizable
strategies is included in the set of sequentially rationalizable strategies.
To illustrate that this inclusion can be strict, consider 4 of Figure 3.1.
Both concepts predict that player 2 plays d with probability one. However, only quasi-perfect rationalizability predicts that player 1 plays D
with probability one. Preferring D to F amounts to preference for cautious behavior since by choosing D player 1 avoids the risk that player
2 may choose f .
Since quasi-perfect rationalizability is thus a refinement of sequential rationalizability, it follows from Proposition 33 that quasi-perfect
rationalizability implies the backward induction procedure in perfect information games.
9.2
The following result helps establishing some of the remaining relationships between the rationalizability concepts of Table 2.2.
119
Quasi-perfectness
Chapter 10
PROPERNESS
122
CONSISTENT PREFERENCES
by a vNM utility function and an LPS, whereby the player may deem
one opponent strategy to be infinitely more likely than another while
still taking the latter strategy into account. In two-player games, their
characterization of proper equilibrium can be described by the following
two properties.
1 Each player is certain of the preferences of his opponent,
2 Each players preferences satisfies that the player takes all opponent
strategies into account (caution) and that the player deems one opponent strategy to be infinitely more likely than another if the opponent prefers the one to the other (respect of opponent preferences).
The present characterization of proper rationalizability in two-player
games drops property 1, which is an equilibrium assumption; instead it
will be assumed that there is common certain belief of property 2, which
will be referred to as proper consistency.
Since, in the present framework, a player is not certain of the preferences of his opponent, player is preferences must be defined on acts from
Sj Tj , where Sj denotes the set of opponent strategies and Tj denotes
the set of opponent types. Under Assumption 1, each type of player i
corresponds to a vNM utility function and an SCLP on Sj Tj . As before, a player i has preference for cautious behavior at ti if he takes into
account all strategies of any opponent type that is deemed subjectively
possible. Moreover, a player i is said to respect opponent preferences
at ti if, for any opponent type that is deemed subjectively possible, he
deems one strategy of the opponent type to be infinitely more likely than
another if the opponent type prefers the one to the other. At ti player
is preferences are said to be properly consistent with the game and the
preferences of his opponent if at ti i both has preference for cautious behavior and respects opponent preferences. Hence, the present analysis
follows the consistent preferences approach by imposing requirements
on the preferences of players rather than their choice.
In this chapter it is first shown (in Proposition 36) how the event
of proper consistency combined with mutual certain belief of the type
profile can be used to characterize the concept of proper equilibrium.
It is then established (in Proposition 37) that common certain belief
of proper consistency corresponds to Schuhmachers (1999) concept of
proper rationalizability. Furthermore, by relating respect of preferences
to inducement of sequential rationality in Proposition 38, it follows by
comparing Proposition 37 with Proposition 33 of Chapter 8 that only
strategies leading to the backward induction outcome are properly ra-
123
Properness
c
r
`
1,
1
1,
1
1,
0
U
M 1, 1 2, 2 2, 2
D 0, 1 2, 2 3, 3
Figure 10.1.
10.1
An illustration
124
CONSISTENT PREFERENCES
10.2
Proper consistency
125
Properness
t`i (sj , tj )
t`i (Sj , tj )
Proposition 36 Consider a finite strategic two-player game G. A profile of mixed strategies p = (p1 , p2 ) is a proper equilibrium if and only if
there exists an epistemic model with (t1 , t2 ) [u] [resp] [cau] such
that (1) there is mutual certain belief of {(t1 , t2 )} at (t1 , t2 ), and (2) for
each i, pi is induced for ti by tj .
The proof is contained in Appendix B. As for similar earlier results,
higher order certain belief plays no role in this characterization.
Characterizing proper rationalizability. We now turn to the
non-equilibrium analog to proper equilibrium, namely the concept of
proper rationalizability; cf. Schuhmacher (1999). To define the concept
of properly rationalizable strategies, we must introduce the following
126
CONSISTENT PREFERENCES
n
o
0
0
127
Properness
Definition 21 (Schuhmacher, 1999) A mixed strategy pi for i is properly rationalizable in a finite strategic two-player game G if there
exists an -epistemic model with piti = pi for some ti projTi CK([u]
[ind] [-prop trem]). A mixed strategy pi for i is properly rationalizable if there exists a sequence (pi (n))nN of (n)-properly rationalizable
strategies converging to pi , where (n) 0 as n .
We next characterize the concept of properly rationalizable strategies
as induced mixed strategies under common certain belief of [u] [resp]
[cau]. The result is proven in Appendix B.
10.3
As shown by van Damme (1984), any proper equilibrium in the strategic form corresponds to a quasi-perfect equilibrium in the extensive form.
The following result shows, by Propositions 34 and 36, this relationship
between the equilibrium concepts and establishes, by Definition 18 and
Proposition 37, the corresponding relationship between the rationalizability concepts. Furthermore, it means that the two cells in Table 2.2
to the left of proper rationalizability are not applicable.
128
CONSISTENT PREFERENCES
10.4
The games G7 (of Figure 10.1), 03 (of Figure 2.4), and 02 (of Figure
2.5) have in common that the properly rationalizable strategies coincide
with those surviving iterated (maximal) elimination of weakly domi-
129
Properness
a
-9
9
b
6
-6
c
-3
3
1/3
1/3
1/3
Player 1
Player 2
Figure 10.2.
A betting game.
130
CONSISTENT PREFERENCES
YY
YN
NY
NN
Figure 10.3.
yy yn ny
-2, 2 -1, 1 -1, 1
-3, 3 -3, 3 0, 0
1, -1 2, -2 -1, 1
0, 0 0, 0 0, 0
nn
0, 0
0, 0
0, 0
0, 0
that player 1, realizing this, should never accept the bet when informed
of {b, c}, sinceas long as 2 never accepts the bet when informed of
{a, b}he cannot win by doing so. This eliminates his strategy NY.
This inductive argument corresponds to IEWDS, except that the latter
procedure eliminates 2s strategies yn and nn in the first round. The
argument seems to imply that player 2 should never accept the bet
if informed of {a, b} and that player 1 should never accept the bet if
informed of {b, c}. Is this a robust conclusion?
Proper rationalizability in the betting game. The strategic
game of Figure 10.3 has a set of Nash equilibria that includes the pure
strategy profiles (NN, ny) and (NN, nn), and a set of (strategic form)
perfect equilibria that includes the pure strategy profile (N N, ny). However, there is a unique proper equilibrium where player 1 plays NN with
probability one, and where player 2 mixes between yy with probability
1/5 and ny with probability 4/5. It is instructive to see why the pure
strategy profile (NN, ny) is not a proper equilibrium. If 1 assigns probability one to 2 playing ny, then he prefers YN to NY (since the more
serious mistake to avoid is to accept the bet when being informed of
{b, c}). However, if 2 respects 1s preferences and certainly believes that
1 prefers YN to NY, then she will herself prefer yy to ny, undermining
(NN, ny) as a proper equilibrium. The mixture between yy and ny in
the proper equilibrium is constructed so that 1 is indifferent between YN
and NY.
Since any mixed strategy is properly rationalizable if it is part of a
proper equilibrium, it follows that both yy and yn are properly rationalizable pure strategies for 2. Moreover, if 1 certainly believes that
2 is of a type with only yy as a most preferred strategy, then NY is
a most preferred strategy for 1, implying that NY in addition to NN
is a properly rationalizable strategy for 1. That these strategies are
in fact properly rationalizable is verified by the epistemic model of Ta-
131
Properness
Table 10.1.
t01
t02
yy
yn
ny
nn
t02
(0, 0, 1, 0)
(0, 0, 0, 1)
(1, 0, 0, 0)
(0, 1, 0, 0)
t002
(0, 0, 0, 0)
(0, 0, 0, 0)
(0, 0, 0, 0)
(0, 0, 0, 0)
t001
YY
YN
NY
NN
t01
(0, 0, 0, 0)
(0, 0, 0, 0)
(0, 0, 0, 0)
(0, 0, 0, 0)
t001
(0, 0, 1, 0)
(0, 0, 0, 1)
(1, 0, 0, 0)
(0, 1, 0, 0)
t002
yy
yn
ny
nn
t02
(0, 0, 0, 0)
(0, 0, 0, 0)
(0, 0, 0, 0)
(0, 0, 0, 0)
t002
(1, 0, 0, 0)
(0, 1, 0, 0)
(0, 0, 1, 0)
(0, 0, 0, 1)
YY
YN
NY
NN
t01
(0, 0, 0, 1)
(0, 1, 0, 0)
(0, 0, 1, 0)
(1, 0, 0, 0)
t001
(0, 0, 0, 0)
(0, 0, 0, 0)
(0, 0, 0, 0)
(0, 0, 0, 0)
ble 10.1. In the table the preferences of any player i at each type ti
are represented by a vNM utility function iti satisfying iti z = ui
and a 4-level LPS on Sj {t0j , t00j }, with the first numbers in the parantheses expressing primary probability distributions, the second numbers
expressing secondary probability distributions, etc. It can be checked
that {t01 , t001 } {t02 , t002 } [u] [resp] [cau], which in turn implies
{t01 , t001 } {t02 , t002 } CK([u] [resp] [cau]) since, for each ti Ti of
any player i, Tjti {t0j , t00j }. Since each types preferences over his/her
own strategies are given by
0
N N t1 Y N t1 N Y t1 Y Y
00
00
00
N Y t1 N N t1 Y Y t1 Y N
0
0
0
ny t2 nn t2 yy t2 yn
00
00
00
yy t2 yn t2 ny t2 nn ,
it follows that NY and NN are properly rationalizable for player 1 and
yy and ny are properly rationalizable for player 2. Note that YY and YN
for player 1 and yn and nn for player 2 cannot be properly rationalizable
since these strategies are weakly dominated and, thus, cannot be most
preferred strategies for cautious players.
The lesson to be learned from this analysis is that is not obvious that
deductive reasoning should lead players to refrain from accepting the
bet in the betting game. The experiments by Sonsino et al. (2000)
and Svik (2001) show that some subjects do in fact accept the bet
in a slightly more complicated version of this game. By comparison to
132
CONSISTENT PREFERENCES
Propositions 33 and 38, the analysis can be used to support the argument
that backward induction in generic perfect information games is more
convincing than the inductive procedure for the betting game discussed
above.
Chapter 11
CAPTURING FORWARD INDUCTION
THROUGH FULL PERMISSIBILITY
134
CONSISTENT PREFERENCES
r
`
1,
1
1,
1
U
M 0, 1 2, 0
D 1, 0 0, 1
Figure 11.1.
135
eliminates strategy sets under full admissible consistency. General existence as well as other properties are shown. Section 11.3 establishes
epistemic conditions for the concept of fully permissible sets, and checks
that these conditions are indeed needed and thereby relates full permissibility to other concepts. Section 11.4 investigates examples, showing
how forward induction is promoted and how multiple fully permissible
sets may arise. Section 11.5 compares our epistemic conditions to those
provided in related literature. As elsewhere in this book, the analysis
will be limited to two-player games. In this chapter (and the next), this
is for ease of presentation, as everything can essentially be generalized
to n-player games (with n > 2).
11.1
136
CONSISTENT PREFERENCES
r
`
1,
1
1,
1
U
M 1, 1 1, 0
D 1, 0 0, 1
Figure 11.2.
admissibly consistent with the game and the preferences of his opponent
if one strategy is preferred to another if and only if the former weakly
dominates the latter
on the set of all opponent strategies, or
on the union of the choice sets that are deemed possible for the opponent.
A subset of strategies is a fully permissible set if and only if it can be
a choice set when there is common certain belief of full admissible consistency. Hence, the analysis yields a solution concept that determines
a collection of choice sets for each player. This collection can be found
via a simple algorithm, introduced in the next section.
We use G9 of Fig. 11.2 to illustrate the consequences of imposing
caution and robust belief of opponent rationality. Since caution
means that each player takes all opponent strategies into account, it
follows that player 1s preferences over his strategies will be U M D
(where and denote indifference and preference, respectively). Player
1 must prefer each of the strategies U and M to the strategy D, because
the former strategies weakly dominate D. Hence, U and M are maximal,
implying that 1s choice set is {U, M }.
The requirement of robust belief in opponent rationality comes into
effect when considering the preferences of player 2. Suppose that 2
certainly believes that 1 is cautious and therefore (as indicated above)
certainly believes that {U, M } is 1s choice set. Our assumption that 2
has robust belief of 1s rationality captures that 2 deems each element
of {U, M } infinitely more likely than D. Thus, 2s preferences respect
weak dominance on 1s choice set {U, M }, regardless of what happens if
1 chooses D. Hence, 2s preferences over her strategies will be ` r.
Summing up, we get to the following solution for G9 :
1s preferences: U M D
2s preferences: ` r
137
Hence, {U, M } and {`} are the players fully permissible sets.
The third feature of full admissible consistencyno extraneous restrictions on beliefsmeans in G9 that 2 does not assess the relative
likelihood of 1s maximal strategies U and M . This does not have any
bearing on the analysis of G9 , but is essential for capturing forward induction in G01 of Figure 2.6. In this case the issue is not whether a player
assesses the relative likelihood of different maximal strategies, but rather
whether a player assesses the relative likelihood of different non-maximal
strategies. To see the significance in G01 , assume that 1 deems r infinitely
more likely than `, while 2 deems Out infinitely more likely than InR
and InR infinitely more likely than InL. Then the players rank their
strategies as follows:
1s preferences: Out InR InL
2s preferences: r `
Both caution and robust belief of opponent rationality are satisfied
and still the forward induction outcome (InL, `) is not promoted. However, the requirement of no extraneous restrictions on beliefs is not
satisfied since the preferences of 2 introduce extraneous restrictions on
beliefs by deeming one of 1s non-maximal strategies, InR, infinitely
more likely than another non-maximal strategy, InL. When we return
to G01 in Sections 11.4 and 11.5, we show how the additional imposition
of no extraneous restrictions on beliefs leads to (InL, `) in this game.
Several concepts with natural epistemic foundations fail to match
these predictions in G01 and G9 . In the case of rationalizabilitycf.
Bernheim (1984) and Pearce (1984)this is perhaps not so surprising
since this concept in two-player games corresponds to IESDS. It can be
understood as a consequence of common belief of rational choice without imposing caution, so there is no guarantee that a player prefers one
strategy to another if the former weakly dominates the latter. In G9 ,
for example, all strategies are rationalizable.
It is more surprising that the concept of permissibility does not
match our solution of G9 . Permissibility can be given rigorous epistemic foundations in models with cautious playerscf. Borgers (1994)
and Brandenburger (1992), who coined the term permissible; see also
Ben-Porath (1997) and Gul (1997) as well as Propositions 24 and 27
of this book. In these models players take into account all opponent
strategies, while assigning more weight to a subset of those deemed to
138
CONSISTENT PREFERENCES
11.2
139
140
CONSISTENT PREFERENCES
\
g=0
i (g) .
141
Again the algorithm yields a unique fully permissible set for each player.
Finally, apply IECFA to G8 of Figure 11.1:
(0) = 1 2
(1) = {{U }, {M }, {U, M }} 2
(2) = {{U }, {M }, {U, M }} {{`}, {`, r}}
= (3) = {{U }, {U, M }} {{`}, {`, r}} .
Here we are left with two fully permissible sets for each player. There is
no further elimination, as {U } = S1 \D1 ({`}), {U, M } = S1 \D1 ({`, r}),
{`} = S2 \D2 ({U, M }), and {`, r} = S2 \D2 ({U }).
The elimination process for G01 and G8 is explained and interpreted
in Section 11.4.
Results. The following proposition characterizes the strategy subsets
that survive IECFA and thus are fully permissible, and is a straightforward implication of Definition 22 (keeping in mind that is finite and,
for each i, i is monotone).
142
CONSISTENT PREFERENCES
UU
UD
DU
DD
Figure 11.3.
`
1, 1
1, 1
0, 1
0, 0
c
1, 1
0, 1
0, 0
0, 1
r
0, 0
1, 0
2, 0
0, 2
11.3
When justifying rationalizable and permissible strategies through epistemic conditions, players are usually modeled as decision makers under uncertainty. Tan and Werlang (1988) characterize rationalizable
strategies by common belief (with probability one) of the event that
each player chooses a maximal strategy given preferences that are represented by a subjective probability distribution. Hence, preferences
are both complete and continuous (cf. Proposition 1). Brandenburger
(1992) characterizes permissible strategies by common belief (with pri-
143
mary probability one) of the event that each player chooses a maximal strategy given preferences that are represented by an LPS with full
support on the set of opponent strategies (cf. Proposition 2). Hence,
preferences are still complete, but not continuous due to the full support requirement. Since preferences are complete and representable by
a probability distribution or an LPS, these epistemic justifications differ
significantly from the corresponding algorithms, IESDS and the DekelFudenberg procedure, neither of which makes reference to subjective
probabilities.1
When doing analogously for fully permissible sets, not only must continuity of preferences be relaxed to allow for caution and robust belief
of opponent rationality, as discussed in Section 11.1. One must also
relax completeness of preferences to accommodate no extraneous restrictions on beliefs, which is a requirement of minimal completeness
and implies that preferences are expressed solely in terms of admissibility on nested sets. Hence, preferences are not in general representable by
subjective probabilities (except through treating incomplete preferences
as a set of complete preferences; cf. Aumann, 1962; Bewley, 1986). This
means that epistemic operators must be derived directly from the underlying preferencesas observed by Morris (1997) and explored further
in Chapter 4 of this booksince there is no probability distribution or
LPS that represents the preferences. It also entails that the resulting
characterization, given in Proposition 41, must be closely related to the
algorithm used in the definition of fully permissible sets.
There is another fundamental difference. When characterizing rationalizable and permissible strategies within the rational choice approach,
the event that is made subject to interactive epistemology is defined by
requiring that each players strategy choice is an element of his choice set
(i.e. his set of maximal strategies) given his belief about the opponents
strategy choice.2 In contrast, in the characterization of Proposition 40,
the event that is made subject to interactive epistemology is defined by
imposing requirements on how each players choice set is related to his
belief about the opponents choice set. Since a players choice set equals
the set of maximal strategies given the ranking that the player has over
his strategies, the imposed requirements relate a players ranking over
1 However,
144
CONSISTENT PREFERENCES
145
Assume that there exists an epistemic model with i = Siti for some
(t1 , t2 ) projT1 T2 CKA0 . In particular, CKA0 6= . Let, for each i,
Ti0 := projTi CKA0 and i := {Siti | ti Ti0 }. It is sufficient to show that,
for each i, i i . By Proposition 25(ii), for each ti Ti0 of any player
i, ti ti {ti } Sj Tj0 since CKA0 = KCKA0 Ki CKA0 . By the
definition of A0 , it follows that, for each ti Ti0 of any player i,
1. ti is conditionally represented by iti satisfying that iti z is a
positive affine transformation of ui , and
2. p ti q iff pEj weakly dominates qEj for Ej = Ejti := projSj Tj ti
or Ej = Sj Tjti , where ti = (projTi Sj Tj [ratj ]) ti .
Write jti := {Sj tj | tj Tj ti } and Yjti := {sj Sj | j jti s.t.
sj j }, and note that ti {ti } Sj Tj0 implies jti j . It
follows that, for any acts p and q on Sj Tj satisfying that there exist
mixed strategies pi , qi (Si ) such that, (sj , tj ) Sj Tj , p(sj , tj ) =
z(pi , sj ) and q(sj , tj ) = z(qi , sj ), p ti q iff pEj weakly dominates qEj
for Ej = Yjti Tj or Ej = Sj Tj . Hence, Siti = Si \Di (Yjti ). Since this
holds for each ti Ti0 of any player i, we have that (). Hence,
Proposition 39(iii) entails that, for each i, i i .
Interpretation. We now show how the event used to characterize
fully permissible setsfull admissible consistencycan be interpreted in
terms of the requirements of caution, robust belief of opponent ratio-
146
CONSISTENT PREFERENCES
3 To
147
and where (t1i , . . . , tLi ) is the profile of nested sets on which ti is admissible, and which satisfies:
6= ti = t1i t`i tLi = ti {ti } Sj Tj
(where denotes and 6=).
If ti projTi B0i [ratj ], then i robustly believes at ti that j is rational.
By Proposition 6 this means that any (sj , tj ) that is deemed subjectively
possible and where sj is a rational choice by j at tj is considered infinitely
more likely than any (s0j , t0j ) where s0j is not a rational choice by j at t0j .
0 [ratj ] entails that ti = (projT S T [ratj ]) ti , it
As ti projTi B
i
i
j
j
0 [ratj ] B0 [ratj ]. Hence, relative to B0 [rat2 ] B0 [rat1 ],
follows that B
1
2
i
i
0 [rat2 ] B
0 [rat1 ] is obtained by imposing minimal completeness, which
B
1
2
in this context yields the requirement of no extraneous restrictions on
beliefs.
As established in Section 4.3, robust belief B0i is a non-monotone operator which is bounded by the two KD45 operators, namely belief Bi
and certain belief Ki . Furthermore, as shown in Chapter 4, the robust
belief operator coincides with the notions of absolutely robust belief,
as introduced by Stalnaker (1998), and assumption, as proposed by
Brandenburger and Keisler (2002), and is closely related to the concept
of strong belief, as used by Battigalli and Siniscalchi (2002). However,
in contrast to the use of non-monotonic operators in these contributions,
our non-monotonic operator B0i is used only to interpret full admissible consistency, while the KD45 operator Ki is used for the interactive
epistemology. The importance of this will be discussed in Section 11.5.
There we also comment on how the present requirement of no extraneous restrictions on beliefs is related to Brandenburger and Keislers
and Battigalli and Siniscalchis use of a preference-complete epistemic
model.
Allowing extraneous restrictions on beliefs. In view of the previous discussion, we allow extraneous restrictions on beliefs by replacing,
0 [ratj ] by B0 [ratj ]. Hence, let for each i,
for each i, B
i
148
CONSISTENT PREFERENCES
149
11.4
Investigating examples
150
CONSISTENT PREFERENCES
S2t2 = {`} .
Brandenburger and Keisler (2002, Theorem 1) as well as Battigalli (1996a) and Rajan
(1998). See also Bicchieri and Schulte (1997), who give conceptually related interpretations
of IEWDS.
151
M infinitely more likely than D for the sole reason that D is eliminated
before M , even though both M and D are eventually eliminated by the
procedure.
Applying our algorithm IECFA yields the following result. Since D
is a weakly dominated strategy, D cannot be an element of 1s choice
set. Hence, 2 certainly believes that only {U }, {M } and {U, M } are
candidates for 1s choice set. This excludes {r} as 2s choice set, since
{r} is 2s choice set only if 2 deems {D} or {U, D} possible. This in turn
means that 1 certainly believes that only {`} and {`, r} are candidates
for 2s choice set, implying that {M } cannot be 1s choice set. There is
no further elimination. This means that 1s collection of fully permissible sets is {{U }, {U, M }} and 2s collection of fully permissible sets is
{`}, {`, r}}. Thus, common certain belief of full admissible consistency
implies that 2 deems U infinitely more likely than D since U (respectively, D) is an element of any (respectively, no) fully permissible set for
1. However, whether 2 deems M infinitely more likely than D depends
on the type of player 2.
To show how common certain belief of the event A0 is consistent with
the collections of fully permissible sets {{U }, {U, M }} and {{`}, {`, r}}
and thus illustrate Proposition 41 also in the case of G8 consider an
epistemic model with two types of each player; i.e., T1 T2 = {t01 , t001 }
{t02 , t002 }. Let, for each type ti of any player i, ti satisfy that iti z = ui .
Moreover, let
0
t1 = {t01 } S2 {t02 }
00
t1 = {t001 } S2 T2
t2 = {t02 } S1 T1
00
t2 = {t002 } S1 {t01 } .
Finally, let for each type ti of any player i, p ti q if and only if pEj
weakly dominates qEj for Ej = projSj Tj ti or Ej = projSj Tj ti . Then
t0
S11 = {U }
t00
S11 = {U, M }
t0
S22 = {`}
t00
S22 = {`, r} .
152
CONSISTENT PREFERENCES
11.5
Related literature
153
154
CONSISTENT PREFERENCES
5 By
not employing subjective probabilities, the analysis is related to the filter model of beliefs
presented by Brandenburger (1997, 1998).
Chapter 12
APPLYING FULL PERMISSIBILITY
TO EXTENSIVE GAMES
12.1
Motivation
156
CONSISTENT PREFERENCES
1c
D
1
0
2s
d
0
2
Figure 12.1.
1s
D
3
0
0
3
f
d
D 1, 0 1, 0
FD 0, 2 3, 0
FF 0, 2 0, 3
1 We
need not consider what players plan to do at decision nodes that their own strategy
precludes them from reaching (cf. Section 12.2).
157
158
CONSISTENT PREFERENCES
f being rational for 2. The intuition for why the strategies D and d are
admitted is as follows: D is 1s unique best strategy if he believes with
probability one that 2 plays d. Player 1 is justified in this belief in the
sense that d is 2s best strategy if she initially believes with probability
one that 1 will choose D, and if called upon to play 2 revises this belief
so as to believe with sufficiently high probability (e.g., probability one)
that 1 is using FD. This belief revision is consistent with Bayes rule,
and so is acceptable.
Ben-Poraths approach is a very important contribution to the literature, since it is a natural next step if one accepts the above critique
of backward induction. Yet we shall argue below that it is too permissive, using 06 as an illustration. Assume that 1 deems d infinitely more
likely than f , while 2 deems D infinitely more likely than FD and FD
infinitely more likely than FF. Then the players rank their strategies as
follows:
1s preferences: D FF FD
2s preferences: d f
This is in fact precisely the justification of the strategies D and d given
above when applying Ben-Poraths approach to 06 . Here, caution is
satisfied since all opponent strategies are taken into account; in particular, FF is preferred to FD as the former strategy weakly dominates
the latter. Moreover, robust belief of opponent rationality is satisfied
since each player deems the opponents maximal strategy infinitely more
likely that any non-maximal strategy. However, the requirement of no
extraneous restrictions on beliefs, as described in Chapter 11, is not
satisfied since the preferences of 2 introduce extraneous restrictions on
beliefs by deeming one of 1s non-maximal strategies, FD, infinitely more
likely than another non-maximal strategy, FF. When we return to G06
in Section 12.3, we show how the additional imposition of no extraneous restrictions on beliefs means that deductive reasoning leads to the
conclusion that {FF} and {f } are the players choice sets in this game.
As established in Chapter 11, our concept of fully permissible sets is
characterized by caution, robust belief of opponent rationality, and
no extraneous restrictions on beliefs. In Section 12.2 we prove results
that justify the claim that interesting implications of deductive reasoning
in a given extensive game can be derived by applying this concept to the
strategic form of that game.
Sections 12.3 and 12.4 are concerned with such applications, with the
aim of showing how our solution concept gives new and economically relevant insights into the implications of deductive reasoning in extensive
159
12.2
160
CONSISTENT PREFERENCES
other if and only if the one weakly dominates the other on Yj the
set of strategies that player i deems to be the set of rational choices for
his opponent or Sj the set of all opponent strategies. Hence, the
strategy is maximal at the outset of a corresponding extensive game.
Corollary 2 makes the observation that this strategy is still maximal
when the preferences have been updated upon reaching any information
set that the choice of this strategy does not preclude.
Assume that player is preferences over his own strategies satisfy that
pi is preferred to qi if and only if pi weakly dominates qi on Yj or Sj .
Let, for any h Hi , Yj (h) := Yj Sj (h) denote the set of strategies
in Yj that are consistent with the information set h being reached. If
pi , qi ( (Si (h))), then is preferences conditional on the information
set h Hi being reached satisfy that pi is preferred to qi if and only
if pi weakly dominates qi on Yj (h) or Sj (h) (where it follows from the
definition that weak dominance on Yj (h) is not possible if Yj (h) = ).
Furthermore, is choice set conditional on h Hi , SiYj (h), is given by
SiYj (h) := Si (h) \ {si Si (h)| xi (Si (h)) s.t.
xi weakly dominates si on Yj (h) or Sj (h)} .
Write SiYj := SiYj () (= Si \Di (Yj ) in earlier notation). By the result
below, if si is maximal at the outset of an extensive game, then it is also
maximal at later information sets for i that si does not preclude.
Corollary 2 Let ( =
6 ) Yj Sj . If si SiYj , then si SiYj (h) for
any h Hi with Si (h) 3 si .
Proof. This follow from Lemma 11 by letting is preferences (at ti )
on is set of mixed strategies satisfy that pi is preferred to qi if and only
if pi weakly dominates qi on Yj or Sj .
By the assumption of caution, each player i takes into account the
possibility of reaching any information set for i that the players own
strategy does not preclude from being reached. Hence, rationality implies weak sequential rationality; i.e., that a player chooses rationally
at all information sets that are not precluded from being reached by the
players own strategy.
Reduced strategic form. It follows from Proposition 45 below that
it is in fact sufficient to consider the pure strategy reduced strategic
form when deriving the fully permissible sets of the game. The following
definition is needed.
161
i with si
i by removing s0i from any
i
i , while, for j 6= i,
j = j .
()
for G,
where
i is obtained from
2 If () for G, then
0
j = j .
i by adding si to any i i with si i , while, for j 6= i,
().
By the observation preceding Proposition
Part 1. Assume
0
45, if
i i , then si
i if and only if si
i . Pick any player k
and any
k k . Let ` denote the other player. By the definition of
`
` such that
k (), there exists ( 6=)
k = SkY` for Y` = `0 ` `0 .
i with si
Construct i by removing s0i from any
i
i and replace
162
CONSISTENT PREFERENCES
Proposition 45 means that the PRSF is sufficient for analyzing common certain belief of full admissible consistency, which is the epistemic
foundation for the concept of fully permissible sets. Consequently, in the
strategic form of an extensive game, it is unnecessary to specify actions
at information sets that a strategy precludes from being reached. Hence,
instead of fully specified strategies, it is sufficient to consider what Rubinstein (1991) calls plans of action. For a generic extensive game, the
set of plans of action is identical to the strategy set in the PRSF.
In the following two sections we apply the concept of fully permissible
sets to extensive games. We organize the discussion around two themes:
backward and forward induction. Motivated by Corollary 2 and Proposition 45, we analyze each extensive game via its PRSF (cf. Definition 23),
given in conjunction to the extensive form. In each example, each plan
of action that appears in the underlying extensive game corresponds to
a distinct strategy in the PRSF.
12.3
Backward induction
Does deductive reasoning in extensive games imply backward induction? In this section we show that the answer provided by the concept
of fully permissible sets is sometimes, but not always.
Sometimes. There are many games where Ben-Poraths approach
does not capture backward induction while our approach does (and the
converse is not true). Ben-Porath (1997) assumes initial common certainty of rationality in extensive games of perfect information. As discussed in Chapter 7 he proves that in generic games (with no payoff
ties at terminal nodes for any player) the outcomes consistent with that
assumption coincide with those that survive the Dekel-Fudenberg procedure (where one round of elimination of all weakly dominated strategies
is followed by iterated elimination of strongly dominated strategies).
It is a general result that the concept of fully permissible sets refines
the Dekel-Fudenberg procedure (cf. Proposition 40). Game 06 of Figure
8.2 shows that the refinement may be strict even for generic extensive
games with perfect information, and indeed that fully permissible sets
may respect backward induction where Ben-Poraths solution does not.
The strategies surviving the Dekel-Fudenberg procedure, and thus consistent with initial common certainty of rationality, are D and FF for
player 1 and d and f for player 2. In Section 12.2 we gave an intuition for
163
why the strategies D and d are possible. This is, however, at odds with
the implications of common certain belief of full admissible consistency.
Applying IECFA to the PRSF of 06 of Figure 8.2 yields:
(0) = 1 2
(1) = {{D}, {FF}, {D, FF}} 2
(2) = {{D}, {FF}, {D, FF}} {{f }, {d, f }}
(3) = {{FF}, {D, FF}} {{f }, {d, f }}
(4) = {{FF}, {D, FF}} {{f }}
= (5) = {{FF}} {{f }}
Interpretation: (1): Caution implies that FD cannot be a maximal strategy (i.e., an element of a choice set) for 1 since it is weakly
dominated (in fact, even strongly dominated). (2): Player 2 certainly
believes that only {D}, {FF} and {D, FF} are candidates for 1s choice
set. By robust belief of opponent rationality and no extraneous restrictions on beliefs this excludes {d} as 2s choice set, since d weakly
dominates f only on {FD} or {D, FD}. (3): 1 certainly believes that
only {f } and {f, d} are candidates for 2s choice set. By robust belief of
opponent rationality and no extraneous restrictions on beliefs this excludes {D} as 1s choice set, since D weakly dominates FD and FF only
on {d}. (4): Player 2 certainly believes that only {FF} and {D, FF}
are candidates for 1s choice set. By robust belief of opponent rationality this implies that 2s choice set is {f } since f weakly dominates d
on both {FF} and {D, FF}. (5): 1 certainly believes that 2s choice
set is {f }. By robust belief of opponent rationality this implies that
{FF} is 1s choice set since FF weakly dominates D on {f }. No further
elimination of choice sets is possible, so {FF} and {f } are the respective
players unique fully permissible sets.
Not always. While fully permissible sets capture backward induction in 06 and other games, the concept does not capture backward
induction in certain games where the procedure has been considered controversial.2 The background for the controversy is the following paradoxical aspect: Why should a player believe that an opponents future
play will satisfy backward induction if the opponents previous play is
incompatible with backward induction? A prototypical game for cast-
2 See
164
CONSISTENT PREFERENCES
165
with backward induction. Or she may consider {D} to be the only subjectively possible choice set for 1, in which case 2s choice set is {d, f }.
Intuitively, if 2 is certain that 1 is a backward inducter, then 2 need not
be a backward inducter herself! In this game, our model captures an
intuition that is very similar to that of Ben-Poraths model.
Reny (1993) defines a class of belief consistent games, and argues on
epistemic grounds that backward induction is problematic only for games
that are not in this class. It is interesting to note that the game where
our concept of fully permissible sets differs from Ben-Poraths analysis
by promoting backward induction, 06 , is belief-consistent. In contrast,
the game where the present concept coincides with his by not yielding
backward induction, 11 , is not belief-consistent. There are examples of
games that are not belief consistent, where full permissibility still implies
backward induction, meaning that belief consistency is not necessary for
this conclusion. It is, however, an as-of-yet unproven conjecture that
belief consistency is sufficient for the concept of fully permissible sets to
promote backward induction.
We now compare our results to the very different findings of Aumann
(1995), cf. also Section 5 of Stalnaker (1998) as well as Chapter 7 of this
book. In Aumanns model, where it is crucial to specify full strategies
(rather than plans of actions), common knowledge of rational choice implies in 11 that all strategies for 1 but DD (where he takes a payoff of 1
at his first node and a payoff of 3 at his last node) are impossible. Hence,
it is impossible for 1 to play FD or FF and thereby ask 2 to play. However, in the counterfactual event that 2 is asked to play, she optimizes as
if player 1 at his last node follows his only possible strategy DD, implying that it is impossible for 2 to choose f (cf. Aumanns Sections 4b, 5b,
and 5c). Thus, in Aumanns analysis, if there is common knowledge of
rational choice, then each player chooses the backward induction strategy. By contrast, in our analysis player 2 being asked to play is seen to
be incompatible with 1 playing DD or DF. For the determination of 2s
preference over her strategies it is the relative likelihood of FD versus
FF that is important to her. As seen above, this assessment depends on
whether she deems {D, FD} as a possible candidate for 1s choice set.
Prisoners dilemma. We close this section by considering a finitely
repeated prisoners dilemma game. Such a game does not have perfect
information, but it can still be solved by backward induction to find
the unique subgame perfect equilibrium (no one cooperates in the last
period, given this no one cooperates in the penultimate period, etc.).
166
CONSISTENT PREFERENCES
T
sN
1
N
V
s1
E
sN
1
sRT
1
sRV
1
sRE
1
Figure 12.2.
T
sN
2
7, 7
8, 4
8, 4
5, 5
6, 2
6, 2
V
sN
2
4, 8
5, 5
5, 5
8, 4
9, 1
9, 1
E
sN
2
4, 8
5, 5
5, 5
5, 5
6, 2
6, 2
sRT
2
5, 5
4, 8
5, 5
3, 3
2, 6
3, 3
sRV
2
2, 6
1, 9
2, 6
6, 2
5, 5
6, 2
sRE
2
2, 6
1, 9
2, 6
3, 3
2, 6
3, 3
This solution has been taken to be counterintuitive; cf, e.g. Pettit and
Sugden (1989). We consider the case of a 3-period prisoners dilemma
game (12 ) and show that, again, the concept of fully permissible sets
does not capture backward induction. However, the fully permissible
sets nevertheless have considerable cutting power. Our solution refines
the Dekel-Fudenberg procedure and generates some special structure
on the choice sets that survive.
The payoffs of the stage game are given as follows, using Aumanns
(1987b, pp. 4689) description: Each player decides whether he will
receive 1 (defect) or the other will receive 3 (cooperate). There is no
discounting. Hence, the action defect is strongly dominant in the stage
game, but still, each player is willing to cooperate in one stage if this induces the other player to cooperate instead of defect in the next stage. It
follows from Proposition 45 that we need only consider what Rubinstein
(1991) calls plans of action.
There are six plans of actions for each player that survive the DekelFudenberg procedure. In any of these, a player always defects in the 3rd
stage, and does not always cooperate in the 2nd stage. The six plans
T N V , sN E , sRT , sRV and
of actions for each player i are denoted sN
i ,si
i
i
i
sRE
,
where
N
denotes
that
i
is
nice
in
the
sense
of
cooperating
in
the 1st
i
stage, where R denotes that i is rude in the sense of defecting in the 1st
stage, where T denotes that i plays tit-for-tat in the sense of cooperating
in the 2nd stage if and only j 6= i has cooperated in the 1st stage, where
V denotes that i plays inverse tit-for-tat in the sense of defecting in the
2nd stage if and only if j 6= i has cooperated in the 1st stage, and where
E denotes that i is exploitive in the sense of defecting in the 2nd stage
independently of what j 6= i has played in the 1st stage. The strategic
form after elimination of all other plans of actions is given in Figure
167
12.2. Note that none of these plans of actions are weakly dominated in
the full strategic form.
Proposition 40 shows that any fully permissible set is a subset of the
set of strategies surviving the Dekel-Fudenberg procedure. Hence, only
subsets of
T NV
E RT RV
RE
{sN
, sN
i , si
i , si , si , si }
can be is choice set under common certain belief of full admissible consistency. Furthermore, under common certain belief of full admissible
consistency, we have for each player i that
T must also contain sN E , since sN T is
any choice set that contains sN
i
i
i
E is a maximal strategy,
a maximal strategy only if sN
i
V must also contain sN E , since sN V
any choice set that contains sN
i
i
i
N
is a maximal strategy only if si E is a maximal strategy,
RT is
any choice set that contains sRT
must also contain sRE
i
i , since si
RE
a maximal strategy only if si is a maximal strategy,
RV is
any choice set that contains sRV
must also contain sRE
i
i , since si
a maximal strategy only if sRE
is a maximal strategy,
i
Given that the choice set of the opponent satisfies these conditions, this
implies that
E is included in is choice set, only the following sets are candiif sN
i
T N E RT RE
N V , sN E , sRV , sRE },
dates for is choice set: {sN
i , si , si , si }, {si
i
i
i
N
E
RE
N
E
or {si , si }. The reason is that si is a maximal strategy only
T
if i considers it subjectively possible that js choice set contains sN
j
E
RT (and hence, sRE ).
(and hence, sN
j ) or sj
j
NE
if sRE
i , but not si , is included in is choice set, only the followRE
RV
RE
ing sets are candidates for is choice set: {sRT
i , si }, {si , si }, or
RE is a maximal strategy only if i con{sRE
i }. The reason is that si
V
NE
siders it subjectively possible that js choice set contains sN
j , sj ,
RV
RE
sj , or sj .
Hence, the only candidates for is choice set under common certain beT N E RT RE
N E RE
lief of full admissible consistency are {sN
i , si , si , si }, {si , si },
RE
RE
{sRT
i , si }, and {si }. Moreover, it follows from Proposition 39(iii)
that all these sets are indeed fully permissible since
168
CONSISTENT PREFERENCES
T N E RT RE
RT RE
{sN
i , si , si , si } is is choice set if he deems {sj , sj }, but not
N
E
RE
N
T
N
E
RT
RE
{sj , sj } and {sj , sj , sj , sj }, as possible candidates for js
choice set,
E RE
N T N E RT RE
{sN
i , si } is is choice set if he deems {sj , sj , sj , sj } as a
possible candidate for js choice set,
RE
RE
{sRT
i , si } is is choice set if he deems {sj } as the only possible
candidate for js choice set,
N E RE
RT RE
{sRE
i } is is choice set if he deems {sj , sj }, but not {sj , sj }
RT
RE
N
E
N
T
and {sj , sj , sj , sj }, as possible candidates for js choice set.
12.4
Forward induction
In Chapter 11 we have already seen how the concept of fully permissible sets promotes the forward induction outcome, (InL, `), in the
PRSF of the battle-of-the-sexes with an outside option game 01 , illustrated in Figure 2.6. In this section we first investigate whether this
conclusion carries over to two other variants of the battle-of-the-sexes
game, before testing the concept of fully permissible sets in an economic
application.
NU
ND
BU
BD
Figure 12.3.
169
`` `r r` rr
3, 1 3, 1 0, 0 0, 0
0, 0 0, 0 1, 3 1, 3
2, 1 -1, 0 2, 1 -1, 0
-1, 0 0, 3 -1, 0 0, 3
3 Also
Battigalli (1991), Asheim (1994), and Dufwenberg (1994), as well as Hurkens (1996) in
a different context, argue that (NU, `r) in addition to (NU, ``) is viable in burning money.
170
CONSISTENT PREFERENCES
Table 12.1.
(0) = 1 2
(1) = {{NU}, {ND}, {BU}, {NU, ND}, {ND, BU}, {NU, BU}, {NU, ND, BU}}
2
(2) = {{NU}, {ND}, {BU}, {NU, ND}, {ND, BU}, {NU, BU}, {NU, ND, BU}}
{{``}, {r`}, {``, `r}, {r`, rr}, {``, r`}, {``, `r, r`, rr}}
(3) = {{NU}, {BU}, {ND, BU}, {NU, BU}, {NU, ND, BU}}
{{``}, {r`}, {``, `r}, {r`, rr}, {``, r`}, {``, `r, r`, rr}}
(4) = {{NU}, {BU}, {ND, BU}, {NU, BU}, {NU, ND, BU}}
{{``}, {r`}, {``, `r}, {``, r`}}
(5) = {{NU}, {BU}, {NU, BU}} {{``}, {r`}, {``, r`}, {``, r`}}
(6) = {{NU}, {BU}, {NU, BU}} {{``}, {``, `r}, {``, r`}}
(7) = {{NU}, {NU, BU}} {{``}, {``, `r}, {``, r`}}
(8) = {{NU}, {NU, BU}} {{``}, {``, `r}}
(9) = {{NU}} {{``}, {``, `r}}
= (10) = {{NU}} {{``, `r}}
171
2
2
out
2c
Out
s1
@
in
InL
`@ r
3
1
0
0
Figure 12.4.
@ InR
@
2
@s
` @r
0
0
1
3
out in`
3
Out
2 2, 2
3
InL
2 3, 1
3
InR
2 0, 0
3
2,
3
2,
3
2,
inr
2, 2
0, 0
1, 3
set, in which case 1s choice set is {Out, InL}. Else {InL} is 1s choice
set. Furthermore, 2 can have a choice set different from {out} only if
she deems {Out, InL} as a subjectively possible candidate for 1s choice
set. Intuitively this means that if 2s choice set differs from {out} (i.e.,
equals {out, in`}), then she deems it subjectively possible that 1 considers it subjectively impossible that in` is a maximal strategy for 2.
Since it is only under such circumstances that in` is a maximal element
for 2, perhaps this strategy is better thought of in terms of strategic
manipulation than in terms of forward induction. Note that the concept of fully permissible sets has more bite than the Dekel-Fudenberg
procedure; in addition to the strategies appearing in fully permissible
sets also inr survives the Dekel-Fudenberg procedure.
An economic application. Finally, we apply the concept of fully
permissible sets to an economic model from organization theory. Schotter (2000) discusses in his Chapter 8 incentives schemes for firms and the
moral hazard problems that may plague them. Revenue-sharing contracts, for example, often invite free-riding behavior by the workers,
and so lead to inefficient outcomes. However, Schotter points to forcing contractsincentive schemes of a kind introduced by Holmstrom
(1982)as a possible remedy: Each worker is paid a bonus if and only
if the collective of workers achieve a certain level of total production.
If incentives are set right, then there is a symmetric and efficient Nash
equilibrium in which each worker exerts a substantial effort. Each worker
avoids shirking because he feels that his role is pivotal, believing that
any reduction in effort leads to a loss of the bonus.
172
CONSISTENT PREFERENCES
1c
@
Out
s
out @ in
@
w
w
w
w
@ In
@
2
@s
out @ in
@s1
w
@
w
@ H
S
@
2
s
@s
s @ h
s@h
0
0
Figure 12.5.
0
c
c
0
bc
bc
out
ins
inh
Out w, w w, w w, w
InS w, w 0, 0 0, -c
InH w, w -c, 0 b-c,b-c
However, forcing contracts are often problematic in that there typically exists a Nash equilibrium in which no worker exerts any effort at
all. How serious is this problem? Schotter offers the following argument
in support of the forcing-contract (p. 302): While the no-work equilibrium for the forcing-contract game does indeed exist, it is unlikely that
we will ever see this equilibrium occur. If workers actually accept such a
contract and agree to work under its terms, we must conclude that they
intend to exert the necessary effort and that they expect their coworkers
to do the same. Otherwise, they would be better off obtaining a job elsewhere at their opportunity wage and not wasting their time pretending
that they will work hard.
Schotter appeals to intuition, but his argument has a forward induction flavor to it. We now show how the concept of fully permissible
sets lends support. Consider the following situation involving a forcing
contract: A firm needs two workers to operate. The workers simultaneously choose shirking at zero cost of effort, or high effort at cost c > 0.
They get a bonus b > c if and only if both workers choose high effort.
As indicated above, this situation can be modeled as a game with two
Nash equilibria (S, s) and (H, h), where (H, h) Pareto-dominates (S, s).
However, let this game be a subgame of a larger game. In line with
Schotters intuitive discussion, add a preceding stage where each worker
simultaneously decides whether to indicate willingness to join the firm
with the forcing contract, or to work elsewhere at opportunity wage w,
0 < w < b c. The firm with the forcing contract is established if and
only if both workers indicate willingness to join it.
173
This situation is depicted by the extensive game 14 . Again, we analyze the PRSF (cf. Figure 12.5). Application of IECFA yields:
(0) = 1 2
(1) = {{Out}, {InH}, {Out, InH}} {{out}, {inh}, {out, inh}}
(2) = {{InH}, {Out, InH}} {{inh}, {out, inh}}
= (3) = {{InH}} {{inh}} .
Interpretation: (1): Shirking cannot be a maximal strategy for either
worker since it is weakly dominated. (2): This excludes the possibility
that a workers choice set contains only the outside option. (3): Since
each worker certainly believes that hard work is, while shirking is not, an
element of the opponents choice set, it follows that each worker deems it
infinitely more likely that the opponent chooses hard work rather than
shirking. This means that, for each worker, only hard work is in his
choice set, a conclusion that supports Schotters argument.
12.5
Concluding remarks
174
CONSISTENT PREFERENCES
Appendix A
Proofs of results in Chapter 4
pm (d0 ) =
8
0
n+1m
>
> n+1 p(d ) +
>
>
<p(d0 )
>
q(d )
>
>
>
:
0
0
p(d )
m
q(d0 )
n+1
if d0 = e0
if d0 E\e0
if d0 = fm0 and m0 {1, . . . , m}
if d0 = fm0 and m0 {m + 1, . . . , n}.
176
CONSISTENT PREFERENCES
177
178
CONSISTENT PREFERENCES
Lemma 15 Assume that d satisfies Axioms 1 and 4 00 (in addition to the assumptions made in Section 4.1), and let `, `0 {1, . . . , Ld } satisfy ` < `0 . Then pdd q
`
implies pdd d q.
`
`0
179
[`
k=1
kd ,
since the first property of Axiom 400 the Archimedean property of d within each
partitional element rules out that e and f are in the same element of the partition
d
d
{1d , . . . , L
d } if e f .
d
Assume that p E q. Then p dEd q, and, by the above argument,
p dS`
k=1
d
k
q.
d
d
since L
k=1 k
d
dE
By Lemma 15, p q
= . Hence, p
q implies p d q. Moreover,
d
E is nontrivial since E 6= , and it follows from Definition 7 that E is assumed
at d.
Appendix B
Proofs of results in Chapters 810
For the proofs of Propositions 30, 34, 36, and 37 we need two results from Blume
et al. (1991b). To state these results, introduce the following notation. Let =
(1 , ..., L ) be an LPS on a finite set F and let r = (r1 , ..., rL1 ) (0, 1)L1 . Then,
r denotes the probability distribution on F given by the nested convex combination
(1 r1 )1 + r1 [(1 r2 )2 + r2 [(1 r3 )3 + r3 [. . . ] . . . ]] .
The first is a restatement of Proposition 2 in Blume et al. (1991b).
tj
XX
sj
tj
for all n n0 .
Proof. Suppose that si ti s0i . Then, there is some ` {1, ..., L} such that
XX
sj
XX
sj
tj
(B.1)
(B.2)
tj
tj
XX
sj
tj
182
CONSISTENT PREFERENCES
Let (r(n))nN be a sequence in (0, 1)L1 converging to zero. By (B.1) and (B.2),
XX
sj
tj
XX
sj
tj
if n is large enough. Since Si is finite, this is true if n is large enough for any si ,
s0i Si satisfying si ti s0i . The other direction follows from the proof of Proposition
1 in Blume et al. (1991b).
For the proofs of Propositions 30 and 34 we need the following definitions. Let
the LPS i = (i1 , . . . , iL ) L(Sj ) have full support on Sj . Say that the behavior
strategy j is induced by i if for all h Hj and a A(h),
j (h)(a) :=
where ` = min{k| supp ik Sj (h) 6= }. Moreover, say that player is beliefs over past
opponent actions i are induced by i if for all h Hi and x h,
i (h)(x) :=
i` (Sj (x))
,
i` (Sj (h))
j (h)(a)
=
=
where ` = min{k| supp ik Sj (h) 6= }. For the fourth equation we used the fact that
pj (n) is the mixed representation of j (n). Hence, for each i, i induces j .
We then show that i induces the beliefs i . Let i be player is beliefs over past
opponent actions induced by i . By definition, h Hi , x h,
i (h)(x)
=
=
183
where ` = min{k| supp ik Sj (h) 6= }. For the fourth equality we used the facts that
pj (n) is the mixed representation of j (n) and i (n) is induced by j (n). Hence, for
each i, i induces i .
We now define the following epistemic model. Let T1 = {t1 } and T2 = {t2 }.
Let, for each i, iti satisfy iti z = ui , and (ti , `ti ) be the SCLP with support
Sj {tj }, where (1) ti coincides with the LPS i constructed above, and (2) `ti (Ej ) =
min{`| supp t`i Ej 6= } for all ( 6=) Ej Sj {tj }. Then, it is clear that
(t1 , t2 ) [u], there is mutual certain belief of {(t1 , t2 )} at (t1 , t2 ), and for each i, i
is induced for ti by tj . It remains to show that (t1 , t2 ) [isr].
For this, it is sufficient to show, for each i, that i is sequentially rational for ti .
Suppose not. By the choice of `ti , it then follows that there is some information set
h Hi and some mixed strategy pi (Si (h)) that is outcome-equivalent to i |h
such that there exist si Si (h) with pi (si ) > 0 and s0i Si (h) having the property
that
ui (si , t`i |Sj (h) ) < ui (s0i , t`i |Sj (h) ) ,
where ` = min{k| supp tki (Sj (h) {tj }) 6= } and t`i |Sj (h) (Sj (h)) is the
conditional probability distribution on Sj (h) induced by t`i . Recall that t`i is the `-th
level of the LPS ti . Since the beliefs i and the behavior strategy j are induced by i ,
it follows that ui (si , t`i |Sj (h) ) = ui (si , j ; i )|h and ui (s0i , t`i |Sj (h) ) = ui (s0i , j ; i )|h
and hence
ui (si , j ; i )|h < ui (s0i , j ; i )|h ,
which is a contradiction to the fact that (, ) is sequentially rational.
(If ) Suppose that there is an epistemic model with (t1 , t2 ) [u] [isr] such that
there is mutual certain belief of {(t1 , t2 )} at (t1 , t2 ), and for each i, i is induced for
ti by tj . We show that = (1 , 2 ) can be extended to a sequential equilibrium.
For each i, let i = (i1 , . . . , iL ) L(Sj ) be the LPS coinciding with ti , and let
i be player is beliefs over past opponent choices induced by i . Write = (1 , 2 ).
We first show that (, ) is consistent.
Choose sequences (r(n))nN in (0, 1)L1 converging to zero and let the sequences
(pj (n))nN of mixed strategies be given by pj (n) = r(n)i for all n. Since i has
full support on Sj for every n, pj (n) is completely mixed. For every n, let j (n)
be a behavior representation of pj (n) and let i (n) be the beliefs induced by j (n).
We show that (j (n))nN converges to j and that (i (n))nN converges to i , which
imply consistency of (, ).
Note that the inducement of j by ti depends on ti through, for each h Hj ,
t`i , where ` = min{k| supp tki (Sj (h) {tj }) 6= }. This implies that j is induced
by i . Since j (n) is a behavior representation of pj (n) and j is induced by i , we
have, h Hj , a A(h),
lim j (n)(h)(a)
=
=
lim
184
CONSISTENT PREFERENCES
=
=
lim
pj (n)(Sj (x))
r(n)i (Sj (x))
= lim
n r(n)i (Sj (h))
pj (n)(Sj (h))
i` (Sj (x))
= i (h)(x),
i` (Sj (h))
Suppose not. Then, ui (i , j ; i )|h < ui (i0 , j ; i )|h for some h Hi and some i0 .
Let pi (Si (h)) be outcome-equivalent to i |h . Then, there is some si Si (h) with
pi (si ) > 0 and some s0i Si (h) such that
ui (si , j ; i )|h < ui (s0i , j ; i )|h .
Since the beliefs i and the behavior strategy j are induced by i , it follows (using the notation that has been introduced in the only if part of this proof) that
ui (si , j ; i )|h = ui (si , t`i |Sj (h) ) and ui (s0i , j ; i )|h = ui (s0i , t`i |Sj (h) )|h and hence
ui (si , t`i |Sj (h) ) < ui (s0i , t`i |Sj (h) ),
which contradicts the fact that i is sequentially rational for ti . This completes the
proof of this proposition.
Proof of Proposition 34. (Only if.) Let (1 , 2 ) be a quasi-perfect equilibrium.
By definition, there is a sequence ((n))nN of completely mixed behavior strategy
profiles converging to such that for each i and every n N and h Hi ,
ui (i , j (n))|h = max
ui (i0 , j (n))|h .
0
i
For each j and every n, let pj (n) be the mixed representation of j (n). By Lemma
16, the sequence (pj (n))nN of probability distributions on Sj contains a subsequence
pj (m) such that we can find an LPS i = (i1 , . . . , iL ) with full support on Sj and a
sequence of vectors r(m) (0, 1)L1 converging to zero with
pj (m) = r(m)i
for all m. W.l.o.g., we assume that pj (n) = r(n)i for all n N.
By the same argument as in the proof of Proposition 30, it follows that i induces
the behavior strategy j . Now, we define an epistemic model as follows. Let T1 = {t1 }
and T2 = {t2 }. Let, for each i, iti satisfy iti z = ui , and (ti , `ti ) be the SCLP
with support Sj {tj }, where (1) ti coincides with the LPS i constructed above,
and (2) `ti (Sj {tj }) = L. Then, it is clear that (t1 , t2 ) [u], there is mutual certain
belief of {(t1 , t2 )} at (t1 , t2 ), and for each i, i is induced for ti by tj . It remains to
show that (t1 , t2 ) [isr] [cau].
185
Since, obviously, (t1 , t2 ) [cau], it suffices to show, for each i, that i is sequentially
rational for ti . Fix a player i and let h Hi be given. Let pi ( (Si (h))) be outcomeequivalent to i |h and let pj (n) be the mixed representation of j (n). Then, since
(1 , 2 ) is a quasi-perfect equilibrium, it follows that
ui (pi , pj (n)|h ) =
max
ui (p0i , pj (n)|h )
si Si (h)
(B.3)
sj Sj (h)
for all n. Let thi be is preferences at ti conditional on h. Since ti projTi [caui ]so
that is system of conditional preferences at ti satisfies Axiom 6 (Conditionality)and
pj (n) = r(n)projSj ti for all n, there exist vectors r(n)|h converging to zero such
that pj (n)|h = r(n)|h projSj thi for all n. Together with equation (B.3) we obtain
that pi (si ) > 0 implies
X
sj Sj (h)
= 0 max
si Si (h)
(B.4)
sj Sj (h)
Siti (h).
sj Sj (h)
sj Sj (h)
for all m, which is a contradiction to (B.4). Hence, si Siti (h) whenever pi (si ) > 0,
which implies that pi (Siti (h)). Hence, i |h is outcome equivalent to some pi
(Siti (h)). This holds for every h Hi , and hence i is sequentially rational for ti .
(If ) Suppose, there is an epistemic model with (t1 , t2 ) [u] [isr] [cau] such that
there is mutual certain belief of {(t1 , t2 )} at (t1 , t2 ), and for both i, i is induced for
ti by tj . We show that (1 , 2 ) is a quasi-perfect equilibrium.
For each i, let i = (i1 , . . . , iL ) L(Sj ) be the LPS coinciding with ti . Choose
sequences (r(n))nN in (0, 1)L1 converging to zero and let the sequences (pj (n))nN
of mixed strategies be given by pj (n) = r(n)i for all n. Since i has full support
on Sj for every n, pj (n) is completely mixed. For every n, let j (n) be a behavior
representation of pj (n). Since i induces j , it follows that (j (n))nN converges to
j ; this is shown explicitly under the if part of Proposition 30. Hence, to establish
that (1 , 2 ) is a quasi-perfect equilibrium, we must show that, for each i and n N
and h Hi ,
ui (i , j (n))|h = max
ui (i0 , j (n))|h .
(B.5)
0
i
Fix a player i and an information set h Hi . Let pi ( (Si (h))) be outcomeequivalent to i |h . Then, equation (B.5) is equivalent to
ui (pi , pj (n)|h ) =
max
ui (p0i , pj (n)|h )
186
CONSISTENT PREFERENCES
for all n. Hence, we must show that pi (si ) > 0 implies that
X
si Si (h)
sj Sj (h)
(B.6)
sj Sj (h)
for all n. In fact, it suffices to show this equation for infinitely many n, since in this
case we can choose a subsequence for which the above equation holds, and this would
be sufficient to show that (1 , 2 ) is a quasi-perfect equilibrium.
Since, by assumption, i is sequentially rational for ti , i |h is outcome equivalent
to some mixed strategy in (Siti (h)). Hence, pi (Siti (h)). Let pi (si ) > 0. By
construction, si Siti (h). Suppose that si would not satisfy (B.6) for infinitely many
n. Then, there exists some s0i Si (h) such that
X
sj Sj (h)
sj Sj (h)
for infinitely many n. Assume, w.l.o.g., that it is true for all n. Let thi be is preferences at ti conditional on h. Since ti projTi [caui ]so that is system of conditional
preferences at ti satisfies Axiom 6 (Conditionality)and pj (n) = r(n)projSj ti for
all n, there exist vectors r(n)|h converging to zero such that pj (n)|h = r(n)|h projSj thi
for all n. This implies that
X
sj Sj (h)
sj Sj (h)
for all n. By applying Lemma 17 in the case of acts on Sj (h){tj }, it follows that i at
ti strictly prefers s0i to si conditional on h, which contradicts the fact that si Siti (h).
Hence, pi (si ) > 0 implies (B.6) for infinitely many n, and as a consequence, (1 , 2 )
is a quasi-perfect equilibrium.
Proof of Proposition 36. (Only if.) Let (p1 , p2 ) be a proper equilibrium. Then,
by Definition 7, there is a sequence (p(n))nN of (n)-proper equilibria converging to
p, where (n) 0 as n . By the necessity part of Proposition 5 of Blume et
al. (1991b), there exists an epistemic model with T1 = {t1 } and T2 = {t2 } where, for
each i,
iti satisfies that iti z = ui ,
the SCLP (ti , `ti ) has the properties that ti = (t1i , . . . , tLi ) with support
Sj {tj } satisfies that, sj Sj , t1i (sj , tj ) = pj (sj ), and `ti satisfies that
`ti (Sj Tj ) = L,
such that (t1 , t2 ) [resp]. This argument involves Lemma 16 (which yields, for each
i, the existence of ti with full support on (Sj {tj }) by means of a subsequence
pj (m) of (pj (n))nN ) and Lemma 17 (which yields that, for m large enough, i having
the conjecture pj (m) leads to the same preferences over is strategies as ti ). The
only-if part follows since it is clear that (t1 , t2 ) [u] [cau], that there is mutual
certain belief of {(t1 , t2 )} at (t1 , t2 ), and that, for each i, pi is induced for ti by tj .
(If.) Suppose that there exists an epistemic model with (t1 , t2 ) [u][resp][cau]
such that there is mutual certain belief of {(t1 , t2 )} at (t1 , t2 ), and, for each i, pi
is induced for ti by tj . Then, by the sufficiency part of Proposition 5 in Blume
et al. (1991b), there exists, for each i, a sequence of completely mixed strategies
187
(pi (n))n converging to pi , where, for each n, (p1 (n), p2 (n)) is an (n)-proper equilibrium and (n) 0 as n . This argument involves Lemma 17 (which yields,
for each j, the existence of (xj (n))nN so that, for all n, i having the conjecture pj (n)
leads to the same preferences over is strategies as ti ).
Proof of Proposition 37. Part 1: If pi is properly rationalizable, then there
exists an epistemic model with (t1 , t2 ) CK([u] [resp] [cau]) such that pi is
induced for ti by tj . In the definition of proper rationalizability, g in Kg [-prop trem]
goes to infinity for each , and then converges to 0. The strategy for the proof
of the only if part of Proposition 37 is to reverse the order of g and , by first
noting that -proper rationalizability implies -proper g-rationalizability for all g,
then showing that -proper g-rationalizability as converges to 0 corresponds to
the gth round of a finite algorithm, and finally proving that any mixed strategy
surviving all rounds of the algorithm is rational under common certain belief of [u]
[resp] [cau] in some epistemic model. The algorithm eliminates preference relations
on the players strategy sets. It is related to, but differs from, Hammonds (2001)
rationalizable dominance relations, which are recursively constructed by gradually
extending a single incomplete binary relation on each players strategy set.
Say that a mixed strategy pi for i is -properly g-rationalizable if there exists an
-epistemic model with piti = pi for some ti projTi Kg ([u] [ind] [-prop trem]).
Since, for all g,
CK[-prop trem]) Kg [-prop trem]) ,
it follows from Definition 21 that if pi is an -properly rationalizable strategy, then,
for all g, there exists an -epistemic model with piti = pi for some ti projTi Kg ([u]
[ind] [-prop trem]). Consequently, if a mixed strategy pi for i is -properly rationalizable, then, for all g, there exists a sequence (pi (n))nN of (n)-properly grationalizable strategies converging to pi , where (n) 0 as n . This means
that it is sufficient to show that if pi satisfies that, for all g, there exists a sequence
(pi (n))nN of (n)-properly g-rationalizable strategies converging to pi and (n) 0
as n , then pi is rational under common certain belief of [u] [resp] [cau] in
some epistemic model. This will in turn be shown in two steps:
1 If a sequence of (n)-properly g-rationalizable strategies converges to pi , then pi
survives the gth round of a finite algorithm.
2 Any mixed strategy surviving all rounds of the algorithm is rational under common
certain belief of [u] [resp] [cau] in some epistemic model.
To construct the algorithm, note that any complete and transitive binary relation
on Si can be represented by a vector of sets (Si (1), . . . , Si (L)) (with L 1) that
constitute a partition of Si . The interpretation is that si is preferred or indifferent to
s0i if and only if si Si (`), s0i Si (`0 ) and ` `0 . Let, for each i, i := 2Si \{} be
the collection of non-empty subsets of Si and
i
188
CONSISTENT PREFERENCES
tj
sj
s0i
tj
ti
XX
si
s0j
ti
0
189
algorithm, then there exists an epistemic model with pi (Siti ) for some ti
projTi CK([u] [resp] [cau]). It is sufficient to show that one can construct an
epistemic model with T1 T2 CK([u] [resp] [cau]) such that, for each i, i =
ti 0
(Si (1), . . . , Si (Li ))
si if and only if
i , there exists ti Ti satisfying that si
0
0
0
si Si (`), si Si (` ) and ` < ` . Construct an epistemic model with, for each i, a
bijection i : Ti
i from the set of types to the collection of vectors in i . Since
g 0 such that g = for g g 0 , it follows from the definition of the algorithm
i
(g )g0 that, for each i,
i is characterized as follows: i = (Si (1), . . . , Si (L ))
j (tj ) = (Sj (1), . . . , Sj (Lj (tj ) ), sj Sj (`), s0j Sj (`0 ) and ` < `0 , and
si ti s0i
if and only if si Si (`), s0i Si (`0 ) and ` < `0 , where iti satisfies iti z = ui and
the SCLP (ti , `ti ) has the property that `ti satisfies `ti (Sj Tj ) = L (so that ti
is represented by iti and ti ). Consider any i = (Si (1), . . . , Si (Li ))
i . By
the construction of the type sets, there exists ti Ti such that i (ti ) = i , and
si ti s0i if and only if si Si (`), s0i Si (`0 ) and ` < `0 ; in particular, Si (1) = Siti . It
remains to be shown that, for each i, T1 T2 [ui ] [respi ] [caui ], implying that
T1 T2 CK([u] [resp] [cau]) since Tjti Tj for each ti Ti of any player i.
It is clear that T1 T2 [ui ] [caui ]. That T1 T2 [respi ] follows from the
property that, for any ti Ti , (sj , tj ) (s0j , tj ) according to ti whenever tj Tjti if
sj Sj (`), s0j Sj (`0 ) and ` < `0 , while sj tj s0j if and only if sj Sj (`), s0j Sj (`0 )
and ` < `0 (where j (tj ) = (Sj (1), . . . , Sj (Lj (tj ) )). This concludes Step 2.
induced for ti by tj . Assume that jtj satisfies jtj z = uj and the SCLP (ti , `ti ) on
Si Tj with support Si {ti } has the property that tj = (1tj , . . . , Ltj ) satisfies,
t
t
si Si , 1 j (si , ti ) = pi (si ) and ` i satisfies ` i (Sj Tj ) = L (so that tj is
t
t
represented by j j and j ). Furthermore, assume that
190
CONSISTENT PREFERENCES
if i (ti ) = (Si (1), . . . , Si (Li (ti ) )), si Si (`), s0i Si (`0 ) and ` < `0 . Then tj
projTj ([uj ] [respj ] [cauj ]), and since Titj Ti , Ti (Tj {tj }) CK([u] [resp]
[cau]). Hence, (t1 , t2 ) CK([u] [resp] [cau]) and pi is induced for ti for tj .
Part 2: If there exists an epistemic model with (t1 , t2 ) CK([u] [resp] [cau])
such that p1 is induced for t1 by t2 , then p1 is properly rationalizable. Schuhmacher
(1999) considers a set of type profiles T = T1 T2 , where each type ti of either player
i plays a completely mixed strategy piti and has a subjective probability distribution
on Sj Tj , for which the conditional distribution on Sj {tj } coincides with pjtj
whenever the conditional distribution is defined. His formulation implies that all
types of a player agrees not only on the preferences but also on the relative likelihood
of the strategies for any given opponent type. In contrast, the characterization given
in Proposition 37 requires the types of a player only to agree on the preferences of
any given opponent type. This difference implies that expanded type sets must be
constructed for the if part of the proof of Proposition 37.
Assume that there exists an epistemic model with (t1 , t2 ) CK([u] [resp] [cau])
such that p1 is induced for t1 by t2 . In particular, CK([u] [resp] [cau]) 6= ,
and p1 (S1t1 ) since CK([u] [resp] [cau]) [resp2 ]. Let, for each i, Ti0 :=
projTi CK([u] [resp] [cau]). Note that, for each ti Ti0 of any player i, ti deems
(sj , tj ) subjectively impossible if tj Tj \Tj0 since CK([u] [ir] [cau]) = KCK([u]
[ir] [cau]) Ki CK([u] [ir] [cau]), implying Tjti Tj0 .
We first construct a sequence, indexed by n, of -epistemic models. By Definition
20 and Assumption 3 this involves, for each n and for each player i, a finite set of
typeswhich we below denote by Ti00 and which will not vary with nand, for each n,
for each i, and for each type i Ti00 , a mixed strategy and a probability distribution
(pi i (n), i (n)) (Si ) (Sj Tj00 ) that will vary with n.
For either player i and each type ti Ti0 of the original epistemic model, make as
many clones of ti as there are members of Tj0 : For each i, Ti00 := {i (ti , tj )| ti Ti0
and tj Tj0 }, where i (ti , tj ) is the clone of ti associated with tj . The term clone
in the above statement reflects that, tj Tj0 , i (ti , tj ) is assumed to share the
preferences of ti in the sense that
1 the set of opponent types that i (ti , tj ) does not deem subjectively possible,
Tji (ti ,tj ) , is equal to {j (t0j , ti )|t0j Tjti } ( Tj00 since Tjti Tj0 ), and
2 the likelihood of (sj , j (t0j , ti )) according to i (ti ,tj ) is equal to the likelihood of
(sj , t0j ) according to ti .
Since Tji (ti ,tj ) = {j (t0j , ti )| t0j Tjti } is independent of tj , but corresponds to disjoint
subsets of Tj00 for different ti s, we obtain the following conclusion for any pair of type
vectors (t1 , t2 ), (t01 , t02 ) T10 T20 :
0
if
if
ti = t0i ,
ti 6= t0i .
This ends the construction of type sets in the sequence of -epistemic models.
Fix a player i and consider any i Ti00 . Since CK([u] [resp] [cau]) [ui ], i
can be represented by a vNM utility function ii satisfying ii z = ui and an LPS
i on Sj Tji . Since CK([u] [resp] [cau]) [caui ], this LPS yields, for each
j Tji , a partition {Eji (1), . . . , Eji (Li )} of Sj Tji , where (sj , j ) (s0j , j )
according to i if and only (sj , j ) Eji (`), (s0j , j0 ) Eji (`0 ) and ` < `0 . Since
191
CK([u] [resp] [cau]) [respi ], it follows that sj is a most preferred strategy for j
in {s0j Sj |(s0j , j ) Eji (`) Eji (Li )} if (sj , j ) Eji (`).
Consider any i and i Ti00 . Construct the sequence (i (n))nN as follows. Choose
i
i {i (ti , tj )|tj Tj0 } one common sequence (ri (n))nN in (0, 1)L 1 converging
i
to 0 and let the sequence of probability distributions ( (n))nN be given by i (n) =
ri (n)i . For all n, suppi (n) = Sj Tji . By Lemma 17 (ri (n))n can be
chosen such that, for all n,
XX
sj
XX
sj
if and only if si i s0i . Hence, for all n, the belief i (n) leads to the same preferences
over is strategies as i . This ends the construction of the sequences (i (n))nN in
the sequence of -epistemic models.
Consider now the construction of the sequence (pi i (n))nN for any i and i Ti00 .
There are two cases. Case 1: If there is j Tj00 such that i Tij , implying that
Si {i } suppj (n), then let pi i (n) be determined by
pi i (n)(si ) =
j (n)(si , i )
.
j (n)(Si , i )
Moreover, for each n, there exists (n) such that, for each player i, the (n)-proper
trembling condition is satisfied at all such types in Ti00 : Since
pi i (n)(s0i )
j (n)(s0i , i )
= j
0 as n
i
pi (n)(si )
(n)(si , i )
if (si , i ) Ei j (`), (s0i , i ) Ei j (`0 ) and ` < `0 , and since si is a most preferred
whenever
XX
sj
type 1 to T100 having the property that 1 (n) = 1 (t1 ,t2 ) (n) for some t2 T20 , but
(t
,t
)
where p1 (n) = (1 n1 )p1 + n1 p1 1 1 2 (n). For all n, we have that the belief 1 (n)
t
leads to the same preferences over 1s strategies as i . This in turn implies that i
192
CONSISTENT PREFERENCES
with, for each type i of any player i, (pi i (n), i (n)) as the sequence of a mixed
strategy and a probability distribution,
as constructed above. Furthermore, it follows that, for all n, the (n)-proper trembling
condition is satisfied at all types in T100 {1 } and at all types in T200 , where (n) 0
as n . Hence, for all n,
(T100 {1 }) T200 CK[(n)-prop trem] ;
in particular, p11 (n) is (n)-properly rationalizable. Moreover, (p11 (n))nN converges to p1 . By Definition 21, p1 is a properly rationalizable strategy.
Appendix C
Proofs of results in Chapter 11
Proof of Proposition 42. Assume that the pure strategy si for i is properly
rationalizable in a finite strategic two-player game G. Then, there exists an epistemic
model satisfying Assumption 1 with si Siti for some (t1 , t2 ) projT1 T2 CK([u]
[resp] [cau]) (this follows from Proposition 37 since CK([u] [resp] [cau]) =
KCK([u] [resp] [cau]) Kj CK([u] [resp] [cau])). In particular, CK([u]
[resp] [cau]) 6= .
By Proposition 20(ii), for each i, CK([u] [resp] [cau]) = KCK([u] [resp]
[cau]) Ki CK([u] [resp] [cau]). Hence, we can construct a new epistemic model
(S1 , T10 , S2 , T20 ) where, for each i, Ti0 := projTi CK([u] [resp] [cau]), as for each
ti Ti0 of any player i, ti = {ti } Sj Tjti {ti } Sj Tj0 . Since T10 T20 [cau],
according to the definition of caution given in Section 5.3, it follows that the new
epistemic model satisfies Axiom 6 for each ti Ti0 of any player i. Therefore, the
new epistemic model satisfies Assumption 2 with S1 T10 S2 T20 [cau] according
to the definition of caution given in Section 6.3. Also, S1 T10 S2 T20 [u]. It
remains to be shown that, for each i, S1 T10 S2 T20 B0i [ratj ], since by the fact
that ti {ti } Sj Tj0 for each ti Ti0 of any player i, we then have an epistemic
model with si Siti for some (t1 , t2 ) projT1 T2 CKA0 .
Since T10 T20 [resp], we have that, for each ti Ti0 of any player i, (sj , tj ) ti
whenever tj Titi and sj tj s0j . In particular, for each ti Ti0 of any player
i, (sj , tj ) ti (s0j , tj ) whenever tj Titi , sj Sjtj and s0j
/ Sjtj . By Proposition 6 this
0
ti
means that, for each ti Ti of any player i, is admissible on projT1 S2 T2 [ratj ]
ti , showing that S1 T10 S2 T20 (B01 [rat2 ] B02 [rat1 ]).
(s0j , tj )
194
CONSISTENT PREFERENCES
that ti deems subjectively possible as follows: Tjti = {tj Tj | sj (tj ) Yjti }. Let, for
each ti Ti of any player i, ti satisfy
1. iti z = ui (so that S1 T1 S2 T2 [u]), and
2. p ti q iff pEj weakly dominates qEj for Ej = Ejti := {(sj , tj )|sj = sj (tj ) and
tj Tjti } or Ej = Sj Tjti , which implies that ti = {ti } Ejti and ti =
{ti } Sj Tjti (so that S1 T1 S2 T2 [cau]).
By the construction of Ejti , this means that Siti = Si \Di (Yjti ) 3 si (ti ) since, for any
acts p and q on Sj Tj satisfying that there exist mixed strategies pi , qi (Si )
such that, (sj , tj ) Sj Tj , p(sj , tj ) = z(pi , sj ) and q(sj , tj ) = z(qi , sj ), p ti q iff
pEj weakly dominates qEj for Ej = Yjti Tj or Ej = Sj Tj . This in turn implies,
for each ti Ti any player i,
3. ti projTi Sj Tj [ratj ] (so that, in combination with 2., S1 T1 S2 T2
i [ratj ] B
j [rati ]).
B
Furthermore, S1 T1 S2 T2 CKA since Tjti Tj for each ti Ti of any player
i. Since, for each player i, si is onto Pi , it follows that, for each si Pi of any player
i, there exists ti Ti with si Siti .
Part 2: If there exists an epistemic model with si Siti for some (t1 , t2 )
projT1 T2 CKA, then si is permissible. Part 2 of the proof of Proposition 27.
Proof of Proposition 44. Part 1: If si is rationalizable, then there exists an
0 . It is sufficient to
epistemic model with si Siti for some (t1 , t2 ) projT1 T2 CKC
construct a belief system with S1 T1 S2 T2 CKC such that, for each si Ri of
any player i, there exists ti Ti with si Siti . Construct a belief system with, for each
i, a bijection si : Ti Ri from the set of types to the the set of rationalizable pure
strategies. By Lemma 9(i) we have that, for each ti Ti of any player i, there exists
Yjti Ri such that there does not exist pi (Si ) such that pi weakly dominates
si (ti ) on Yjti . Determine the set of opponent types that ti deems subjectively possible
as follows: Tjti = {tj Tj | sj (tj ) Yjti }. Let, for each ti Ti of any player i, ti
satisfy
1. iti z = ui (so that S1 T1 S2 T2 [u]), and
2. p ti q iff pEj weakly dominates qEj for Ej = Ejti := {(sj , tj )|sj = sj (tj ) and
tj Tjti }, which implies that ti = ti = {ti } Ejti .
By the construction of Ejti , this means that Siti 3 si (ti ) since, for any acts p and
q on Sj Tj satisfying that there exist mixed strategies pi , qi (Si ) such that,
(sj , tj ) Sj Tj , p(sj , tj ) = z(pi , sj ) and q(sj , tj ) = z(qi , sj ), p ti q iff pEj weakly
dominates qEj for Ej = Yjti Tj . This in turn implies, for each ti Ti any player i,
3. ti projTi Sj Tj [ratj ] (so that, in combination with 2., S1 T1 S2 T2
0i [ratj ] B
0j [rati ]).
B
0 since Tjti Tj for each ti Ti of any player
Furthermore, S1 T1 S2 T2 CKC
i. Since, for each player i, si is onto Ri , it follows that, for each si Ri of any player
i, there exists ti Ti with si Siti .
Part 2: If there exists an epistemic model with si Siti for some (t1 , t2 )
projT1 T2 CKC, then si is rationalizable. Part 2 of the proof of Proposition 25.
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Index
202
174
Game
extensive game, 6, 1415, 17, 23, 5051,
56, 8085, 87, 8991, 94, 99, 101103,
105106, 108109, 113, 117119, 152,
155, 158160, 162, 173
of perfect information, 20, 7982, 8485,
8792, 94, 97, 100101, 113, 118, 121,
123, 128, 132, 162
strategic game, 24, 78, 5354, 5657,
5961, 6366, 69, 71, 73, 76, 8385,
88, 9091, 94, 101103, 121, 125130,
139, 144, 148149, 159, 161, 193
pure strategy reduced strategic form
(PRSF), 133, 156, 159164, 168170,
173
Inducement (of rationality)
of a rational mixed strategy, 5, 58
of a sequentially rational behavior
strategy, 104
of a weak sequentially rational mixed
strategy, 107
Iterated elimination
Dekel-Fudenberg procedure, 1314, 2324,
65, 69, 78, 81, 83, 88, 112, 124, 138,
141, 143, 148, 162, 166168, 171
of choice sets under full admissible
consistency (IECFA), 138142,
150151, 163164, 169170, 173
of strongly dominated strategies (IESDS),
13, 2324, 60, 69, 83, 133, 137138,
141143, 149
of weakly dominated strategies (IEWDS),
14, 1617, 129130, 133135, 141142,
150, 152153, 159, 169
No extraneous restrictions on beliefs, 135,
137, 139, 143, 146149, 153154, 158,
163164, 173
Probability system
conditional probability system (CPS),
2425, 3436, 50, 109
REFERENCES
lexicographic conditional probability
system (LCPS), 31, 3536, 4950
lexicographic probability system (LPS),
2425, 3033, 36, 43, 49, 56, 60,
6263, 65, 67, 76, 88, 9394, 96, 102,
104, 106107, 110, 116, 122, 131, 143,
181185, 187190
system of conditional lexicographic
probabilities (SCLP), 25, 32, 3536,
5657, 59, 6164, 66, 100, 102104,
109110, 114116, 121122, 183184,
186, 189
Rational choice approach, 13, 6, 1112, 143
Rationalizability
(ordinary) rationalizability, 8, 13, 18, 53,
60, 69, 73, 124, 137138, 142143,
146, 149, 153
extensive form rationalizability, 99,
112113, 135, 152153, 156, 159
full permissibility, 17, 112, 134146,
148152, 154155, 157173
permissibility, 1315, 1718, 53, 62, 6567,
69, 7577, 81, 87, 112, 115, 119, 124,
137138, 141143, 146, 148149,
153154, 193194
proper rationalizability, 1, 16, 1819,
121125, 127131, 146148, 174, 187,
190, 192193
quasi-perfect rationalizability, 1, 1516,
18, 24, 101, 115116, 118119, 128
sequential rationalizability, 1, 1516, 18,
99101, 104, 106107, 111115,
118119, 128, 174
weak sequential rationalizability, 18, 20,
107112, 119
Strategic manipulation, 171
Strategically independent set, 8485, 110,
119
Subjective possibility, 3839, 43