Solution concepts for games with ambiguous payoffs

Abstract

I consider games with ambiguous payoffs played by non-Expected Utility decision makers. Three equilibrium solutions are studied. Nash equilibrium in which equilibrium mixed strategies must be best responses, Crawford equilibrium in beliefs and pure equilibrium in beliefs in which equilibrium strategies are mixtures of best responses, with the latter restricting best responses to pure actions. I study the interactions between ambiguity preferences on one side and equilibrium properties on the other. I show how the equilibrium concepts differ, computing necessary and sufficient conditions for existence and equivalence. I also show how these solution concepts fare against two fundamental principles of Nash equilibrium in standard games: the principle of indifference and the reduction principle. Given both are central to the computation of Nash equilibrium in games with Expected Utility players, their failure indicates how relaxing the Expected Utility hypothesis may disrupt standard game theoretic results such as the characterization of equilibria in two-player games.