Working Paper Abstract
287."Dynamic Psychological Games"by Pierpaolo Battigalli (University Bocconi) and Martin Dufwenberg (University of Arizona)
Building on recent work on dynamic interactive epistemology, weextend the analysis of extensive-form psychological games (Geneakoplos,Pearce & Stacchetti, Games and Economic Behavior, 1989) toinclude conditional higher-order beliefs and enlarged domains of pay-offfunctions. The approach allows modeling dynamic psychologicaleffects (such as sequential reciprocity, psychological forward induction,and regret) that are ruled out when epistemic types are identified withhierarchies of initial beliefs. We define a notion of psycholigical sequentialequilibrium, which generalizes the sequential equilibrium notion fortraditional games, for which we prove existence under mild assumptions.Our framework also allows us to directly formulate assumptions about "dynamic" rationality and interactive beliefs in order to explore strategic interaction without assuming that players' beliefs are coordinated on anequilibrium. In particular, we provide an exploration of (extensive-form)rationalizability in psychological games.
Keywords: psychological games, belief-dependent motivation, extensive-form solution concepts,dynamic interactive epistemology.
JEL classification: C72, C73
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