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The B.E. Journal of Theoretical Economics

Editor-in-Chief: Schipper, Burkhard

Ed. by Fong, Yuk-fai / Peeters, Ronald / Puzzello , Daniela / Rivas, Javier / Wenzelburger, Jan

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Counterfactual Reasoning and Common Knowledge of Rationality in Normal Form Games

Eduardo Zambrano
Published Online: 2004-11-10 | DOI: https://doi.org/10.2202/1534-598X.1020

When evaluating the rationality of a player in a game one has to examine counterfactuals such as "what would happen if the player were to do what he does not do?" In this paper I develop a model of a normal form game where counterfactuals of this sort are evaluated as in the philosophical literature (cf. Lewis, 1973; Stalnaker, 1968). According to this method one evaluates a statement like ``what would the player believe if he were to do what he does not do'' at the world that is closest to the actual world where the hypothetical deviation occurs. I show that in this model common knowledge of rationality need not lead to rationalizability. I also present assumptions that allow rationalizability to follow from common knowledge of rationality. These assumptions suggest that rationalizability may not rely on weaker assumptions about belief consistency than Nash equilibrium.

Keywords: Common knowledge; counterfactual reasoning; interactive epistemology; rationalizability.

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Published Online: 2004-11-10

Citation Information: Topics in Theoretical Economics, ISSN (Online) 1534-598X, DOI: https://doi.org/10.2202/1534-598X.1020.

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