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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