Rationalizability and Common Knowledge of Rationality

Abstract

This chapter deals with the implications of rationality in normal form games. It first explores the ramifications of the rationalizability assumption and shows that in many cases rational individuals will not play rationalizable strategies. It argues that the informal reasoning supporting rationalizability must be replaced by a more rigorous analytical framework. This framework is known as epistemic game theory. Using epistemic game theory, it presents the argument that not rationality, but rather common knowledge of rationality, implies that players will only use rationalizable strategies. The chapter concludes by showing that there is no justification of the common knowledge of rationality assumption, and hence there is no reason to believe that in general rational players will choose rationalizable strategies. It strengthens this conclusion by showing that even assuming common knowledge of rationality, there is no reason for a rational player to conform to the iterated elimination of strongly dominated strategies.