Paper #1468

Title:

Bounded rationality and correlated equilibria

Authors:

Fabrizio Germano and Peio Zuazo-Garin

Date:

February 2015

Abstract:

We study an interactive framework that explicitly allows for non-rational behavior. We do not place any restrictions on how players can deviate from rational behavior. Instead we assume that there exists a lower bound p E [0,1] such that all players play and are believed to play rationally with a probability p or more. This, together with the assumption of a common prior, leads to what we call the set of p-rational outcomes, which we define and characterize for arbitrary p E [0,1]. We then show that this set varies continuously in p and converges to the set of correlated equilibria as p approaches 1, thus establishing robustness of the correlated equilibrium concept to relaxing rationality and common knowledge of rationality. The p-rational outcomes are easy to compute, also for games of incomplete information, and they can be applied to observed frequencies of play to compute a measure p that bounds from below the probability with which any given player is choosing actions consistent with payoff maximization and common knowledge of payoff maximization.

Keywords:

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

JEL codes:

C72, D82, D83.

Area of Research:

Microeconomics

Published in:

International Journal of Game Theory, Forthcoming

Download the paper in PDF format