p. cm. — (Zeuthen lecture book series) Includes bibliographical references (p. ) and index. ISBN 0-262-18187-8 (hardcover : alk. paper). — ISBN 0-262-68100-5 (pbk. : alk. paper) 1. Decision-making. 2. Economic man. 3. Game theory. 4. Rational expectations (Economic theory) I. Title. II. Series.

Game theory has proved a useful tool in the study of simple economic models. However, numerous foundational issues remain unresolved. The situation is particularly confusing in respect of the non-cooperative analysis of games with some dynamic structure in which the choice of one move or another during the play of the game may convey valuable information to the other players. Without pausing for breath, it is easy to name at least 10 rival equilibrium notions for which a serious case can (...) be made that here is the “right” solution concept for such games. (shrink)

According to a simple form of consequentialism, we should base decisions on our judgments about their consequences for achieving our goals. Our goals give us reason to endorse consequentialism as a standard of decision making. Alternative standards invariably lead to consequences that are less good in this sense. Yet some people knowingly follow decision rules that violate consequentialism. For example, they prefer harmful omissions to less harmful acts, they favor the status quo over alternatives they would otherwise judge to be (...) belter, they provide third-party compensation on the basis of the cause of an injury rather than the benefit from the compensation, they ignore deterrent effects in decisions about punishment, and they resist coercive reforms they judge to be beneficial. I suggest that nonconsequentialist principles arise from overgeneralizing rules that are consistent with consequentialism in a limited set of cases. Commitment to such rules is detached from their original purposes. The existence of such nonconsequentialist decision biases has implications for philosophical and experimental methodology, the relation between psychology and public policy, and education. (shrink)

We present a theory of honor violence as a form of costly signaling. Two types of honor violence are identified: revenge and purification. Both types are amenable to a signaling analysis whereby the violent behavior is a signal that can be used by out-groups to draw inferences about the nature of the signaling group, thereby helping to solve perennial problems of social cooperation: deterrence and assurance. The analysis shows that apparently gratuitous acts of violence can be part of a system (...) of norms that are Pareto superior to alternatives without such signals. For societies that lack mechanisms of governance to deter aggression or to enforce contracts, norms of honor can be a rational means of achieving these functions. The theory also suggests that cultures can become trapped in inefficient equilibria owing to path-dependent phenomena. In other words, costly signals of honor may continue to be sent even when they are no longer providing useful information. (shrink)

Probably many people have cyclic preferences: they prefer A to B, B to C and C to A for some objects of choice A, B and C. Recent work has resurrected the objection to cyclic preference that agents possessing them are open to exploitation by means of ‘money pumps’. The paper briefly reviews this work and proposes a general approach to problems of sequential choice that makes cyclic preference immune to exploitation by means of these new mechanisms.

Lecture audiences and students were asked to respond to virtual decision and game situations at gametheory.tau.ac.il. Several thousand observations were collected and the response time for each answer was recorded. There were significant differences in response time across responses. It is suggested that choices made instinctively, that is, on the basis of an emotional response, require less response time than choices that require the use of cognitive reasoning.

Contents. Introduction. 1. Preliminaries. 2. Normal Form Games. 3. Extensive Games. 4. Applications of Game Theory. 5. The Methodology of Game Theory. Conclusion. Appendix. Bibliography. Index. Does game theory—the mathematical theory of strategic interaction—provide genuine explanations of human behaviour? Can game theory be used in economic consultancy or other normative contexts? Explaining Games: The Epistemic Programme in Game Theory—the first monograph on the philosophy of game theory—is an attempt to combine insights from epistemic logic and the philosophy of science to (...) investigate the applicability of game theory in such fields as economics, philosophy and strategic consultancy. I prove new mathematical theorems about the beliefs, desires and rationality principles of individual human beings, and explore in detail the logical form of game theory as it is used in explanatory and normative contexts. I argue that game theory reduces to rational choice theory if used as an explanatory device, and that game theory is nonsensical if used as a normative device. A provocative account of the history of game theory reveals that this is not bad news for all of game theory, though. Two central research programmes in game theory tried to find the ultimate characterisation of strategic interaction between rational agents. Yet, while the Nash Equilibrium Refinement Programme has done badly thanks to such research habits as overmathematisation, model-tinkering and introversion, the Epistemic Programme, I argue, has been rather successful in achieving this aim. "The 'epistemic' approach to game theory has emerged over the past twenty-five years. What is this approach? How does it differ from the conventional equilibrium-based approach to game theory? What have been its strengths and weaknesses to date? To find out, read this comprehensive and excellently written account". Adam Brandenburger, J. P. Valles Professor of Business Economics and Strategy, Stern School of Business, New York University "Reading Boudewijn de Bruin's book should be rewarding both for game theorists interested in the conceptual foundations of their discipline and for philosophers who want to learn more about formal analysis of strategic interaction. It provides an in-depth logical study of the currently dominant epistemic approaches to non-cooperative games, with an eye both to the attractions and to the serious challenges facing the Epistemic Programme". Wlodek Rabinowicz, Professor of Practical Philosophy, Department of Philosophy, Lund University . (shrink)

This is the second part of a two-part paper. It can be read independently of the first part provided that the reader is prepared to go along with the unorthodox views on game theory which were advanced in Part I and are summarized below. The body of the paper is an attempt to study some of the positive implications of such a viewpoint. This requires an exploration of what is involved in modeling “rational players” as computing machines.

The notion of bounded rationality has recently gained considerable popularity in the behavioural and social sciences. This article surveys the different usages of the term, in particular the way ‘anomalosus’ behavioural phenomena are elicited, how these phenomena are incorporated in model building, and what sort of new theories of behaviour have been developed to account for bounded rationality in choice and in deliberation. It also discusses the normative relevance of bounded rationality, in particular as a justifier of non‐standard reasoning and (...) deliberation heuristics. For each of these usages, the overview discusses the central methodological problems. (shrink)

Concern for one's "reputation" has been introduced in recent game theory enabling theorists to demonstrate the rationality ofcooperative behavior in certain contexts. And these impressive results have been generalized to a variety of situations studied bystudents of business and business ethicists. But it is not clear that the notion of reputation employed has much explanatory power onceone sees what is meant. I also suggest that there may be some larger lessons about the notion of rationality used by decision theorists.

We propose a theoretical model to explain the usage of time-inconsistent behavior as a strategy to exploit others when reputation and trust have secondary effects on the economic outcome. We consider two agents with time-consistent preferences exploiting common resources. Supposing that an agent is believed to have time-inconsistent preferences with probability p, we analyze whether she uses this misinformation when she has the opportunity to use it. Using the model originally provided by Levhari and Mirman (Bell J Econ 11(1):322–334, 1980), (...) we determine the optimal degree of present bias that the agent would like to have while pretending to have time-inconsistent preferences and we provide the range of present-bias parameter under which deceiving is optimal. Moreover, by allowing the constant relative risk aversion class of utility form, we characterize the distinction between pretending to be naive and sophisticated. (shrink)

Recent interest in phenomena of simulation, pretense, and play has given rise to new philosophical debates on the basic structure of human action and action planning. Some philosophers sought to transform Hume's desire-belief-action model by sophisticating its basic structure. For example, they introduced “hypothetical world boxes” or imaginary “i-desires” and “i-beliefs” into the standard model, in order to account for the representational and motivational structures of imaginary scripts. Others used phenomena of behavior driven by imagination to attempt a more fundamental (...) critique of the Humean tradition. This article aims to show how the pragmatist tradition could be used as a resource in reframing current debates on imagination, pretense, and simulation in the cognitive sciences. This will help determine the role of imagination in intelligent human deliberation. (shrink)

This paper addresses the conflicting environmental interests of a firm and the community, an important stakeholder. The short-term profit maximization objective of a firm may stand in contrast with what the community wants – a "safe and clean environment". This paper argues that the information regarding the environmental impact of a firm's products, processes, and waste may be asymmetrically distributed between the firm and the community. The resultant information asymmetry may influence the probability of a firm acting opportunistically, and ultimately, (...) a firm's ethical behavior. The paper identifies information asymmetry between a firm and community, as well as that within the community. The perceived information asymmetry across various community segments may perhaps be a determinant of environmental discrimination. The paper further contends that information asymmetry may diminish in the long run. Finally it examines the implications of information asymmetry for firms and government policy. (shrink)

In this contribution I outline some ideas on what the pragmatist model of habit ontology could offer us as regards the appreciation of the constitutive role that imagery plays for social action and cognition. Accordingly, a Deweyan understanding of habit would allow for an understanding of imagery in terms of embodied cognition rather than in representational terms. I first underline the motor character of imagery, and the role its embodiment in habit plays for the anticipation of action. Secondly, I reconstruct (...) Dewey's notion of imaginative rehearsal in light of contemporary, competing models of intersubjectivity such as embodied simulation theory and the narrative practice hypothesis, and argue that the Deweyan model offers us a more encompassing framework which can be useful for reconciling these approaches. In this text I am mainly concerned with sketching a broad picture of the lines along which such a project could be developed. For this reason not all questions are given equal attention, and I shall concentrate mainly on the basic ideas, without going directly into the details of many of them. (shrink)

A cornerstone of game theory is backward induction, whereby players reason backward from the end of a game in extensive form to the beginning in order to determine what choices are rational at each stage of play. Truels, or three-person duels, are used to illustrate how the outcome can depend on (1) the evenness/oddness of the number of rounds (the parity problem) and (2) uncertainty about the endpoint of the game (the uncertainty problem). Since there is no known endpoint in (...) the latter case, an extension of the idea of backward induction is used to determine the possible outcomes. The parity problem highlights the lack of robustness of backward induction, but it poses no conflict between foundational principles. On the other hand, two conflicting views of the future underlie the uncertainty problem, depending on whether the number of rounds is bounded (the players invariably shoot from the start) or unbounded (they may all cooperate and never shoot, despite the fact that the truel will end with certainty and therefore be effectively bounded). Some real-life examples, in which destructive behavior sometimes occurred and sometimes did not, are used to illustrate these differences, and some ethical implications of the analysis are discussed. (shrink)

Contemporary theories of deterrence place a strong emphasis on coherency between model and theory. Schelling’s contention of irrational threats for successful deterrence abandons the rationality assumption to explain how a player can deter, thereby departing from the standard game theoretic solution concepts. It is a misfit model in relation to a deterrence theory and, therefore, excluded. The article defends and remodels Schelling’s intuition by employing the level-k model. It is shown that an unsophisticated player that randomizes over its strategies brings (...) about an advantageous outcome. The model also shows that the belief that a player randomizes has the same deterrent effect, as an actual stochastic choice, like Schelling suggested. While this means Schelling’s idea can be saved, it is still problematic how we should view contributions of bounded rationality in relation to current deterrence theory. The article suggests that separating the purpose of a model in conjunction with allowing other scientific ideals than model-theory coherence permits a broader and philosophically sounder approach. (shrink)

We analyze the sequential structure of dynamic games with perfect information. A three-stage account is proposed, that species setup, reasoning and play stages. Accordingly, we define a player as a set of agents corresponding to these three stages. The notion of agent connectedness is introduced into a type-based epistemic model. Agent connectedness measures the extent to which agents' choices are sequentially stable. Thus describing dynamic games allows to more fully understand strategic interaction over time. In particular, we provide suffcient conditions (...) for backward induction in terms of agent connectedness. Also, our framework makes explicit that the epistemic independence assumption involved in backward induction reasoning is stronger than usually presumed, and makes accessible multiple-self interpretations for dynamic games. (shrink)

According to a simple form of consequentialism, we should base decision on our judgments about their consequences for achieving out goals. Our goals give us reason to endorse consequentialism as a standard of decision making. Alternative standards invariably lead to consequences that are less good in this sense. Yet some people knowingly follow decision rules that violate consequentialism. For example, they prefer harmful omissions to less harmful acts, they favor the status quo over alternatives they would otherwise judge to be (...) better, they provide third-party compensation on the basis of the cause of an injury rather than the benefit from the compensation, they ignore deterrent effects in decisions about punishment, and they resist coercive reforms they judge to be beneficial. I suggest that nonconsequentialist principles arise from overgeneralizing rules that are consistent with consequentialism in a limited set of cases. Commitment to such rules is detached from their original purposes. The existence of such nonconsequentialist decision biases has implications for philosophical and experimental methodology, the relation between psychology and public policy, and education. (shrink)

Robert Aumann argues that common knowledge of rationality implies backward induction in finite games of perfect information. I have argued that it does not. A literature now exists in which various formal arguments are offered in support of both positions. This paper argues that Aumann's claim can be justified if knowledge is suitably reinterpreted.

In certain finite extensive games with perfect information, Cristina Bicchieri (1989) derives a logical contradiction from the assumptions that players are rational and that they have common knowledge of the theory of the game. She argues that this may account for play outside the Nash equilibrium. She also claims that no inconsistency arises if the players have the minimal beliefs necessary to perform backward induction. We here show that another contradiction can be derived even with minimal beliefs, so there is (...) no paradox of common knowledge specifically. These inconsistencies do not make play outside Nash equilibrium plausible, but rather indicate that the epistemic specification must incorporate a system for belief revision. Whether rationality is common knowledge is not the issue. (shrink)

In the methodology of scientific research programs (MSRP) there are important features on the problem of prediction, especially regarding novel facts. In his approach, Imre Lakatos proposed three different levels on prediction: aim, process, and assessment. Chapter 5 pays attention to the characterization of prediction in the methodology of research programs. Thus, it takes into account several features: (1) its pragmatic characterization, (2) the logical perspective as a proposition, (3) the epistemological component, (4) its role in the appraisal of research (...) programs, and (5) its place as a value for scientific research. -/- The notion of “novel facts” is highly relevant in his conception, where several aspects are involved: the directions of novel facts, the different kinds of novelty, and the transition from six possible options of “novel facts” to four choices. Thereafter, the prediction of novel facts as the criterion of appraisal is considered. On the one hand, this requires analyzing the theoretical, empirical, and heuristic possibilities of appraisal; and, on the other, whether there is an overemphasis on the role of prediction in methodology of scientific research programs. As a consequence, there is an analysis of Lakatos’ criterion of appraisal in MSRP and economics. (shrink)

Backward induction was one of the earliest methods developed for solving finite sequential games with perfect information. It proved to be especially useful in the context of Tom Schelling’s ideas of credible versus incredible threats. BI can be also extended to solve complex games that include an infinite number of actions or an infinite number of periods. However, some more complex empirical or experimental predictions remain dramatically at odds with theoretical predictions obtained by BI. The primary example of such a (...) troublesome game is Centipede. The problems appear in other long games with sufficiently complex structure. BI also shares the problems of subgame perfect equilibrium and fails to eliminate certain unreasonable Nash equilibria. (shrink)

The backward induction controversy in game theory flared up and then practically ended within a decade – the 1990s. The protagonists, however, did not converge on an agreement about the source of the controversy. Why was this the case, if opposing sides had access to the same modelling techniques and empirical facts? In this paper I offer an explanation for this controversy and its unsettled end. The answer is not to be found in the modelling claims made by the opposing (...) protagonists, but in the tacit metaphors they operate under. Aristotle defined metaphor as giving a 'thing a name that belongs to something else' (Poetica, 1457b). The meaning of metaphors has not changed much since then – in contrast to models which are comparatively new, and still not well-understood, scientific tools. The controversy of backward induction in game theory provides a test bed for the explanatory power of metaphors. This paper frames the controversy in terms of metaphor choice to provide a common framework for the protagonists. This results in the identification of three different domains – mathematical logic, game theory and the world – each connected to the other via different metaphors. The controversy around backward induction is placed in, and tentatively explained by, this framework. (shrink)