Proper belief revision and equilibrium in dynamic games

Abstract

We present a theory of rationality in dynamic games in which players, during the course of the game, may revise their beliefs about the opponents’ utility functions. The theory is based upon the following three principles: (1) the players’ initial beliefs about the opponents’ utilities should agree on some profile u of utility functions, (2) every player should believe, at each of his information sets, that his opponents are carrying out optimal strategies and (3) a player at information set h should not change his belief about an opponent's ranking of strategies a and b if both a and b could have led to h . Scenarios with these properties are called preference conjecture equilibria for the profile u of utility functions. We show that every normal form proper equilibrium for u induces a preference conjecture equilibrium for u , thus implying existence of preference conjecture equilibrium.