Forward induction reasoning and correct beliefs

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Article
Author/s: 
Andr├ęsPerea
Journal of Economic Theory
Issue number: 
Volume 169, May 2017
Publisher: 
Elsevier
Year: 
2017
Journal pages: 
489-516
All equilibrium concepts implicitly make a correct beliefs assumption, stating that a player believes that his opponents are correct about his first-order beliefs. In this paper we show that in many dynamic games of interest, this correct beliefs assumption may be incompatible with a very basic form of forward induction reasoning: the first two layers of extensive-form rationalizability (Pearce, 1984; Battigalli, 1997, epistemically characterized by Battigalli and Siniscalchi, 2002). Hence, forward induction reasoning naturally leads us away from equilibrium reasoning. In the second part we classify the games for which equilibrium reasoning is consistent with this type of forward induction reasoning, and find that this class is very small.
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