The implications of finite‐order reasoning

Abstract

The epistemic conditions of rationality and mth‐order strong belief of rationality (R mSBR; Battigalli and Siniscalchi, 2002) formalize the idea that players engage in contextualized forward‐induction reasoning. This paper characterizes the behavior consistent with R mSBR across all type structures. In particular, in a class of generic games, R( m − 1)SBR is characterized by a new solution concept we call an m‐best response sequence ( m‐BRS). Such sequences are an iterative version of extensive‐form best response sets (Battigalli and Friedenberg, 2012). The strategies that survive m rounds of extensive‐form rationalizability are consistent with an m‐BRS, but there are m‐BRS's that are disjoint from the former set. As such, there is behavior that is consistent with R( m − 1)SBR but inconsistent with m rounds of extensive‐form rationalizability. We use our characterization to draw implications for the interpretation of experimental data. Specifically, we show that the implications are nontrivial in the three‐repeated Prisoner's Dilemma and Centipede games.