Irrationality and ambiguity in extensive games

Abstract

Based on a model where deviations from equilibrium play are assumed to identify irrational players who are characterized by ambiguous set-valued strategies, this paper introduces an equilibrium notion for extensive games with ambiguity averse players that yields a precise interpretation for the counterfactual reasoning usually associated with backward induction. The resulting equilibria are always Nash equilibria, but may not satisfy the conditions required for various refinements of Nash equilibrium, including those for subgame perfection. Existence of such equilibria is proved for all two-player games, and for N-player games with perfect information.