Rothe, Jorn
(1999)
Rationality, uncertainty aversion and equilibrium concepts in normal and extensive form games.
PhD thesis, London School of Economics and Political Science.
Abstract
This thesis contributes to a re-examination and extension of the equilibrium concept in normal and extensive form games. The equilibrium concept is a solution concept for games that is consistent with individual rationality and various assumptions about players' knowledge about the nature of their strategic interaction. The thesis argues that further consistency conditions can be imposed on a rational solution concept. By its very nature, a rational solution concept implicitly defines which strategies are non-rational. A rational player's beliefs about play by non-rational opponents should be consistent with this implicit definition of non-rational play. The thesis shows that equilibrium concepts that satisfy additional consistency requirements can be formulated in Choquet-expected utility theory, i.e. non-expected utility theory with non-additive or set-valued beliefs, together with an empirical assumption about players' attitude toward uncertainty. Chapter 1 introduces the background of this thesis. We present the conceptual problems in the foundations of game theory that motivate our approach. We then survey the decision-theoretic foundations of Choquet-expected utility theory and game-theoretic applications of Choquet-expected utility theory that are related to the present approach. Chapter 2 formulates this equilibrium concept for normal form games. This concept, called Choquet-Nash Equilibrium, is shown to be a generalization of Nash Equilibrium in normal form games. We establish an existence result for finite games, derive various properties of equilibria and establish robustness results for Nash equilibria. Chapter 3 extends the analysis to extensive games. We present the equivalent of subgame-perfect equilibrium, called perfect Choquet Equilibrium, for extensive games. Our main finding here is that perfect Choquet equilibrium does not generalize, but is qualitatively different from subgame-perfect equilibrium. Finally, in chapter 4 we examine the centipede game. It is shown that the plausible assumption of bounded uncertainty aversion leads to an 'interior' equilibrium of the centipede game.
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