We present a new class of models of players’ reasoning in non-cooperative games, inspired by David Lewis's account of common knowledge. We argue that the models in this class formalize common knowledge of rationality in a way that is distinctive, in virtue of modelling steps of reasoning; and attractive, in virtue of being able to represent coherently common knowledge of any consistent standard of individual decision-theoretic rationality. We contrast our approach with that of Robert Aumann, arguing that the former avoids (...) and diagnoses certain paradoxes to which the latter may give rise when extended in particular ways. (shrink)

Rational choice theory enjoys unprecedented popularity and influence in the behavioral and social sciences, but it generates intractable problems when applied to socially interactive decisions. In individual decisions, instrumental rationality is defined in terms of expected utility maximization. This becomes problematic in interactive decisions, when individuals have only partial control over the outcomes, because expected utility maximization is undefined in the absence of assumptions about how the other participants will behave. Game theory therefore incorporates not only rationality but also common (...) knowledge assumptions, enabling players to anticipate their co-players' strategies. Under these assumptions, disparate anomalies emerge. Instrumental rationality, conventionally interpreted, fails to explain intuitively obvious features of human interaction, yields predictions starkly at variance with experimental findings, and breaks down completely in certain cases. In particular, focal point selection in pure coordination games is inexplicable, though it is easily achieved in practice; the intuitively compelling payoff-dominance principle lacks rational justification; rationality in social dilemmas is self-defeating; a key solution concept for cooperative coalition games is frequently inapplicable; and rational choice in certain sequential games generates contradictions. In experiments, human players behave more cooperatively and receive higher payoffs than strict rationality would permit. Orthodox conceptions of rationality are evidently internally deficient and inadequate for explaining human interaction. Psychological game theory, based on nonstandard assumptions, is required to solve these problems, and some suggestions along these lines have already been put forward. Key Words: backward induction; Centipede game; common knowledge; cooperation; epistemic reasoning; game theory; payoff dominance; pure coordination game; rational choice theory; social dilemma. (shrink)

This commentary focuses on the parts of psychological game theory dealing with preference, as illustrated by team reasoning, and supports the conclusion that these theoretical notions do not contribute above and beyond existing theory in understanding social interaction. In particular, psychology and games are already bridged by a comprehensive, formal, and inherently psychological theory, interdependence theory (Kelley & Thibaut 1978; Kelley et al. 2003), which has been demonstrated to account for a wide variety of social interaction phenomena.