Eran Hanany , Faculty of Engineering, Tel Aviv University Peter Klibanoff , Department of Managerial Economics and Decision Sciences, Kellogg School of Management, North-western University Sujoy Mukerji , Queen Mary University of London
September 13, 2018
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We study incomplete information games with ambiguity averse players. Our focus is on equilibrium concepts satisfying sequential optimality each player's strategy is optimal at each information set given opponents' strategies. We show sequential optimality, which does not make any explicit assumption on updating, is equivalent to sequential optimality with respect to beliefs updated using a particular generalization of Bayesian updating. Ambiguity aversion expands the set of equilibria compatible with players sharing common ambiguous beliefs. We connect ambiguity aversion with belief robustness. Examples illustrate new strategic behaviour, including strategic use of ambiguity, under ambiguity aversion.
J.E.L classification codes: C72, D82, D81
Keywords:Ambiguity aversion, dynamic games, incomplete information, multi-stage games, sequential optimality, sequential equilibrium with ambiguity, ambiguous strategies, smooth ambiguity model