Paper #1630

Title:

Strategic cautiousness as an expression of robustness to ambiguity

Authors:

Gabriel Ziegler and Peio Zuazo-Garin

Date:

January 2019

Abstract:

Economic predictions often hinge on two intuitive premises: agents rule out the possibility of others choosing unreasonable strategies (�strategic reasoning�), and prefer strategies that hedge against unexpected behavior (�cautiousness�). These two premises conflict and this undermines the compatibility of usual economic predictions with reasoning-based foundations. This paper proposes a new take on this classical tension by interpreting cautiousness as robustness to ambiguity. We formalize this via a model of incomplete preferences, where (i) each player�s strategic uncertainty is represented by a possibly non-singleton set of beliefs and (ii) a rational player chooses a strategy that is a best-reply to every belief in this set. We show that the interplay between these two features precludes the conflict between strategic reasoning and cautiousness and therefore solves the inclusion-exclusion problem raised by Samuelson (1992). Notably, our approach provides a simple foundation for the iterated elimination of weakly dominated strategies

Keywords:

Game theory, decision theory, ambiguity, Knightian uncertainty, incomplete preferences, Bayesian rationality, cautiousness, iterated admissibility

JEL codes:

C72, D82

Area of Research:

Microeconomics

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