Utility proportional beliefs
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In game theory, basic solution concepts often conflict with experimental findings or intuitive reasoning. This fact is possibly due to the requirement that zero probability is assigned to irrational choices in these concepts. Here, we introduce the epistemic notion of common belief in utility proportional beliefs which also attributes positive probability to irrational choices, restricted however by the natural postulate that the probabilities should be proportional to the utilities the respective choices generate. Besides, we propose a procedural characterization of our epistemic concept. With regards to experimental findings common belief in utility proportional beliefs fares well in explaining observed behavior.
KeywordsAlgorithms Epistemic game theory Interactive epistemology Solution concepts Traveler’s dilemma Utility proportional beliefs
We are grateful to conference participants at the Eleventh Conference of the Society for the Advancement of Economic Theory (SAET2011) as well as to seminar participants at Maastricht University, City University of New York (CUNY), and University of Helsinki for useful and constructive comments. Besides, valuable remarks by two anonymous referees are highly appreciated.
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