The focus for the Centre is research into individual and strategic decision-making using a combination of theoretical and experimental methods. On the theory side, members of the Centre investigate individual choice under uncertainty, cooperative and non-cooperative game theory, as well as theories of psychology, bounded rationality and evolutionary game theory. Members of the Centre have applied experimental methods in the fields of public economics, individual choice under risk and uncertainty, strategic interaction, and the performance of auctions, markets and other economic institutions. Much of the Centre's research involves collaborative projects with researchers from other departments in the UK and overseas. Robin.Cubitt@nottingham.ac.uk r.sugden@uea.ac.uk * We are grateful for comments on earlier versions of the paper to Giacomo Bonnano, Adam Brandenburger, John Collins and participants in various seminars, conferences and workshops at which we have presented the paper.2
AbstractThe game-theoretic assumption of 'common knowledge of rationality' leads to paradoxes when rationality is represented in a Bayesian framework as cautious expected utility maximisation with independent beliefs (ICEU). We diagnose and resolve these paradoxes by presenting a new class of formal models of players' reasoning, inspired by David Lewis's account of common knowledge, in which the analogue of common knowledge is derivability in common reason. We show that such models can consistently incorporate any of a wide range of standards of decision-theoretic practical rationality. We investigate the implications arising when the standard of decision-theoretic rationality so assumed is ICEU.
Short title
Common reasoning in games
KeywordsCommon reasoning; common knowledge; common knowledge of rationality; David Lewis; Bayesian models of games. 1
IntroductionIt is a fundamental assumption of standard game theory that each player of a game acts rationally and that this is common knowledge amongst them -in short, that there is common knowledge of rationality (CKR). In most day-to-day applications of game theory, this assumption is not explicit; analysis is conducted using established 'solution concepts', such as Nash equilibrium or iterated deletion of dominated strategies. But one of the core enterprises of standard game theory has been to investigate the implications of CKR for solution concepts, and there has been a long-standing presumption that acceptable solution concepts ought at least to be consistent with CKR.Intuitively, CKR seems a meaningful idealisation, in the same sense that perfect competition is a meaningful idealisation in economics or frictionless surfaces are in theoretical mechanics. However, attempts to formalise the assumption have sometimes generated paradoxical implications that appear to call into question the coherence of the concept. In this paper, we offer a diagnosis of these paradoxes and, by presenting a new class of 'common-reasoning models', show how the intuitive idea of CKR can be formulated without c...