Backwards Induction in General Belief Structures

with and without Strategies

Thorsten Clausing1), Arnis Vilks2)

1) Universität Magdeburg 2) (Corresponding author)

Lehrstuhl VWL III Leipzig Graduate School of Management
Fakultät für Wirtschaftswissenschaft Department of Microeconomics
Universitätsplatz 2 Jahnallee 59
D-39106 Magdeburg, Germany D-04109 Leipzig, Germany
thorsten.clausing@ww.uni-magdeburg.de vilks@hhl.de

ABSTRACT. Aumann (1995) has shown that „common knowledge of substantive rationality“
implies the backwards induction (BI) outcome in any (generic) perfect information game. In
Aumann’s framework, (a) knowledge is modeled by means of partitional information structures, (b)
it is assumed that at each state of the world, each player has a strategy, and (c) ”substantive”
rationality requires of a player to ”plan” a move for any of his decision nodes on the supposition
that the node is reached – even if he knows that it will not be reached.
We show that none of these features is essential for the BI argument. Instead, (A) we work
with belief structures which allow for the possibility that players are mistaken, and that neither
positive nor negative introspection hold, (B) we do not assume that players must always have
strategies, and (C) we use what we call ”relative” rationality conditions, which which only require
that a player does not make a move whereof he knows that another one he considers possible
implies a higher payoff. Moreover, we use the assumption that, (D) for any reached node, the move
prescribed by the BI profile is considered possible by the player whose move it is.
Our Theorem 1 says that common belief (CB) of relative rationality (in the sense of (C)),
and of conditional possibility of the BI moves (in the sense of (D)) is both necessary and sufficient
for CB in the BI outcome. Theorem 2 says that there will be correct CB in the BI outcome, if and
only if, in addition to the condition of Theorem 1, all players are relatively rational. Next, we
consider the case where players have strategies, and reconsider Aumann’s condition for BI.
Theorem 3 says that even in general belief structures Aumann’s condition remains sufficient for CB
in the BI outcome. Theorem 4 says there will be correct CB in the BI outcome, if in addition to the
CB of Theorem 3, every player knows his own strategy, and plays according to it. Finally, we show
that the BI outcome is already implied by ‚forward belief‘ in both relative rationality and
conditional possibility of moves, provided that these forward beliefs are correct.

This version: February 2002. Many thanks to Geir Asheim, Bart Lipman, and Dov Samet for
suggesting a translation of originally syntactic formulations into the state-space framework, and to
Yossi Feinberg for many helpful comments, in particular for suggesting Remark 4. Arnis Vilks
wants to express his gratitude to the Center for the Study of Language and Information at the
University of Stanford, where parts of the present paper were written.

Keywords: Backward Induction, Epistemic Conditions, Rationality, Common Belief, Forward

Belief
 2

1. Introduction

In a much discussed paper, Aumann (1995) has formulated a sufficient condition for the backwards

induction (BI) play of a (generic) perfect information (PI) game. While Aumann‘s condition can be

regarded as a formalization of „common knowledge of rationality“, his model contains several

background assumptions the role of which is not entirely clear. Among others, Aumann‘s model has

the following features:

(a) Knowledge is modelled by means of a partitional information structure.

(b) At each state of the world, each player has a strategy for the game, i.e., a plan of action for all

his decision nodes - including nodes whereof he knows that they will not be reached.

(c) „Substantive“ rationality of a player is defined by the condition that ''no matter where he finds

himself - at which vertex - he will not knowingly continue with a strategy that yields him less than

he could have gotten with a different strategy'' (Aumann, 1995, p.7).

In the present paper we show that none of these features is essential for the backwards induction

argument. In fact, it seems intuitively clear that the BI argument nowhere depends on introspective

reasoning. It also seems to „go through“ regardless of whether players‘ beliefs in unreached

successors‘ rationality is mistaken or not. Quite similarly, the assumption that players must have

strategies seems unnecessarily strong: For instance, an irrational player off the BI path who is
 3

mistakenly believed to be rational by all the other players may well have no definite plan of action

at all - while the BI argument may still apply. Our approach has the following main features:

(A) We work with general belief structures, which are not required to be partitional. We do assume

that beliefs are always consistent, but they may be mistaken, and neither positive nor negative

introspection are assumed.

(B) We assume that, at each state of the world, a particular path through the game-tree will be

followed, but that this need not result from players‘ having strategies.

(C) We use ”relative” rationality conditions, which are defined in terms of moves (instead of

strategies), and which only require that a player does not make a move whereof he knows that

another one he considers possible implies a higher payoff.

(D) A further distinguishing feature of our approach is the assumption that, for any reached node,

the move prescribed by the BI profile is considered possible by the player whose move it is. In our

case of possibly mistaken beliefs some such assumption seems to be an unavoidable presupposition

of the BI argument. After all, even at a reached node a player might not consider possible a move

which „actually“ - according to the rules of the given game - is a move he might take.

Our Theorem 1 says that common belief (CB) of relative rationality (in the sense of C) and of

conditional possibility of the BI moves (in the sense of D) is both necessary and sufficient for CB
 4

in the BI outcome of the game. Our Theorem 2 says that this CB will be correct, if and only if, in

addition to condition of Theorem 1, all players are relatively rational. We then reconsider Aumann‘s

condition for BI and show in Theorems 3 and 4 that it remains a sufficient condition for BI even

without the partitional information structure assumed by Aumann. Actually, Aumann‘s condition

turns out to be stronger than ours. Finally, we adapt the notion of „forward knowledge“ introduced

in different versions by Balkenborg and Winter (1997), Rabinowicz (1998), and Sobel (1998), and

show in Theorem 5 that the BI play is already implied by forward belief in relative rationality and

conditional possibility of the BI moves at any given node, provided that these beliefs are correct.

The paper is organized as follows: The next section presents notation and the formal framework,

Section 3 explains the main ideas by means of a very simple example, while Sections 4, 5, and 6

respectively state the general results for the case of CB without strategies, for CB with strategies,

and forward belief. Section 7 discusses possibility of non-BI moves, the important, but special case

of the Centipede game, and the timing of beliefs, and relates our results to previous work, including

beliefs derived from probabilities. All proofs are relegated to Section 8.

2. The framework

For the given PI game we consider, the following notation will be used:

N the set of players

Vi the set of player i‘s decision nodes

 5

V the set of all decision nodes, i.e., V= ^i0N Vi

v0 the initial node

Z the set of terminal nodes

X the set of all nodes, i.e., X=VcZ

< the precedence relation on X

á(v) the set of immediate successors of node v, i.e. á(v)={w0X| v<w and for no u0V: v<u<w}

ði(v) player i‘s payoff at terminal node v

i(v) the player who makes a move at node v, i.e. the i0N for which v0Vi

Throughout, we assume that the PI game under consideration is in general position, i.e., ði(t)…ði(t‘)

whenever t…t‘.

Si the set of player i‘s strategies, where each strategy is formally treated as a mapping from Vi

to X, i.e., Si :={si :Vi 6X| si(v)0á(v) for all v 0Vi}

As usual, we set

S = (j0NSj the set of all (strategy) profiles

S-i = (j0N\{i}Sj

s-i = (sj)j0N\{i},
 6

s = (si, s-i), and

s(v) = si(v) for any s=(si, s-i), and v0Vi.

We will use é for the BI profile, and â(v) for the terminal node induced by the BI profile in the

subgame with origin v. For v0Z, we set â(v)=v. It will be important in what follows to distinguish

carefully between moves on the BI path, i.e., moves preceding â(vo), and BI moves. The latter term

will be used for all moves assigned by é to some decision node, independently of whether this

belongs to the BI path or not.

A belief structure (for the given PI game) consists of

a set Ù (the set of states),

a function o:Ù 6Z,

and for each player i0N,

a function Ki :Ù 62Ù (i‘s possibility correspondence),

such that Ki (ù)…i (for all ù0Ù).

The intended interpretation is that o(ù) contains the terminal node actually reached in state ù, thus

the event that a particular node v is reached, is

[v]:={ù | v<o(ù)}.
 7

Note that this event can alternatively be interpreted as the event that the player at the immediate

predecessor of v actually makes the move that leads to v.

The intended interpretation of Ki(ù) is as the set of those states which i considers possible when the

actual state is ù. For any player i, and any event EdÙ, we can therefore define the event that i

considers E possible by

Pi(E):={ù0Ù | ›ù*0Ki(ù):ù*0 E},

and the event that i (fully) believes E by

Bi(E) := {ù0Ù | œù*0Ki(ù):ù*0 E}.

Writing ~E for Ù(E, we note that both Bi(E)=~Pi(~E), and ~Bi(~E) = Pi(E) hold identically. Below,

we will mostly follow the tradition to express possibility in terms of belief, but we emphasize that

there is no reason whatsoever to view the notion of belief as more basic than the notion of

possibility.

For events E and F we define the event

E6F := (~EcF),
 8

which can be interpreted as the event that E holds only if F does. We adopt the bracketing

convention that EcF6G and E1F6G stand for (EcF)6G and (E1F)6G, respectively.

Mutual belief in event E is defined as follows:

B(E):= _i0N Bi(E),

m-th order mutual belief in E is defined recursively by

B1(E):= B(E)

Bm(E):= B(Bm-1(E)) for m>1,

and common belief in E by

CB(E):= _ m$1Bm(E).

Common belief among some subset MdN of players is defined analogously, and will be denoted

CBM(E).

In order to compare our epistemic conditions for BI with Aumann‘s, we will also consider belief

structures with strategies, which consist of a belief structure and

 9

a function s:Ù 6S.

As usual, s(ù) will also be written as (si(ù))i0N, where si(ù)0Si, and s-i(ù) will stand for (sj(ù))j0N\{i}.

3. A Simple Example

Before turning to general definitions and results, we explain the main ideas for one of the simplest

games where the BI argument applies, the „Bipede“ of Figure 1.

Intuitively, the BI argument applies if

(1) player I is rational, and

(2) player I believes that player II is rational.

 10

It should not matter for the BI argument whether I‘s belief in II‘s rationality is mistaken or not. If

(1) and (2) are satisfied, one should expect the BI outcome x regardless of whether II is in fact

rational. However, it does matter for the BI argument, whether I believes that II, if reached,

considers y possible. If I believed that II does not consider y possible, it will be rational for I to play

„across“. Quite similarly, the BI outcome x cannot be expected, if I does not consider it possible.

After all, as we are considering beliefs which can be mistaken, it might be the case that Figure 1

shows the „objective“ game, but that player I mistakenly believes that he is physically unable to

make the move leading to x. Thus, when beliefs may be mistaken, the BI argument seems to require

the following assumptions in addition to (1) and (2):

(3) player I considers x possible, and

(4) player I believes that II, if reached, considers y possible.

Given a belief structure for the game of Figure 1, it is straightforward to represent the latter two

assumptions by events:

(iii) PI([x])

(iv) BI( [v1]6PII([y]) )

Which events should be taken to represent assumptions (1) and (2)? When beliefs may be false, it

becomes problematic to define rationality as choice of a best move from those which are in fact
 11

possible. Clearly, the best move for II, if she is reached, is the one leading to y. However, if we

observed outcome z, should we conclude that II is irrational? With respect to the „objective“

possibilities depicted in the game tree, the answer is „clearly yes“, but if II believes that she cannot

carry out her BI move, it seems she is still rational relative to what she considers possible. This

motivates our notion of relative rationality. Relative rationality only requires that a player forbears

to make a move if he considers possible an alternative one which he believes to imply a higher

payoff. For player I in our example this implies that a state at which I is relatively rational belongs

to the following event:

(i) BI([v1]6[y]) 1 PI([x]) 6 ~[v1]

Relative rationality of I at a state would also require that the state belongs to the following event:

(i‘) BI([v1]6[z]) 1 PI([v1]) 6 ~[x]

For the general case, the event of relative rationality will in fact be defined as the intersection of all

such events, but for our simple example we will only need event (i). Relative rationality of player

II can be formulated in an even simpler way, as she can have no doubt about the outcomes of her

moves. (Formally, [y]6[y]=Ù=BII([y]6[y]).) Thus, if assumption (2) is satisfied at a state (and

rationality is construed as relative rationality) that state belongs to the following event:

(ii) BI( PII([y])6~[z] )

 12

It is now easy to verify that the intersection of events (i), (ii), (iii), and (iv) is a subset of [x]. In

words: If I believes that II is relatively rational and, if reached, considers her BI move possible, then

I will make his BI move, provided that he considers this possible and is relatively rational.

4. Backwards Induction without Strategies

Consider a belief structure (Ù, o, (Ki )i0N) for a given PI game. In order to express our condition of

relative rationality, consider player i‘s decision node v, two immediate successors v+, v- 0á(v), and

two terminal nodes t+, t- such that ði(t+)>ði(t-). If i is relatively rational, it should not happen that he

believes both [v+]6[t+] and [v-]6[t-], considers [v+] possible, but still makes the move from v to v-.

Hence we define the event that player i=i(v) is relatively rational at his node v by

Relative rationality of all players at all their nodes is defined as the event

We define conditional possibility of the BI move at v0V to be the following event:

 13

Conditional possibility of all BI moves is then expressed by the event

Finally, we define I to be the event that the BI path is followed, and the BI outcome is thus reached:

I:={ù| o(ù)=â(v0)}

The first main result of the present contribution is that CB in both relative rationality and

conditional possibility of the BI moves is both necessary and sufficient for CB in the BI outcome.

Theorem 1. CB(RR 1 CPI) = CB(I)

Clearly, if there is CB in the BI outcome, and beliefs are correct, the BI outcome must result. Our

next Theorem shows that much less than full veridicality of beliefs needs to be added to derive the

BI outcome.

Theorem 2. RR 1 CB( RR 1 CPI ) = CB(I) 1 I

Intuitively, the derivation from Theorem 1 is simple: Once there is CB in the BI outcome, the

players must consider their BI moves at reached nodes possible, and believe that no moves off the

BI path will be made. Together with relative rationality, this implies that only BI moves will

actually be made. On the other hand, if players consider only the moves on the BI path possible, and
 14

actually play them, relative rationality is clearly satisfied.

5. Backwards Induction with Strategies

In order to relate our results to Aumann‘s, we now consider a belief structure with strategies, (Ù, o,

(Ki )i0N, s), as defined in Section 2 above, which allows us to consider events defined in terms of

both outcomes and strategies. Aumann assumes that having a strategy in state ù means playing

according to that strategy. While certainly very natural, this assumption is not empty: If a strategy

is interpreted as specifying what a player plans, or has decided to do (at each of his nodes, if it were

reached), one may well imagine that a player does not stick to his plan, or that he revises his

decision (cf. Kramarz, 1993). Even if one follows Aumann in thinking „of the players as attaching

automata to their vertices before play starts“ (Aumann, p. 12), it is at least conceivable that the

automata can be reprogrammed, or that they do not work as programmed. Be that as it may, in our

framework we can express the assumption of „play according to strategies“ by the following event

PAS:

PAS := {ù| o(ù) is the outcome induced by s(ù)}.

Following Aumann, the event that player i‘s strategy is si is defined as follows:

[si=si] := {ù| si(ù)=si}.

 15

Aumann‘s assumption that each player knows his own strategy can be represented by the event:

KOS := _i0N _si0Si ([si=si]6Bi [si=si]).

Finally, to express Aumann‘s „substantive“ rationality condition, we define, for each decision node

v, each player i, and profile s, the payoff of player i which he would get if v were reached, and the

subgame with origin v were played according to s:

ðiv(s) := ði( s(s(...s(v)...)) ).

The event that i would get a higher payoff with strategy si than with his actual strategy if v were

reached can be written as

[ðiv(si, s-i)>ðiv(s)] := {ù| ðiv(si, s-i(ù))>ðiv(s(ù))}.

Player i is substantively rational if no event of this sort is believed by him. Thus the event

„substantive rationality“ can be defined as follows:

SR := _i0N _v0Vi _si0Si ~Bi [ðiv(si, s-i)>ðiv(s)].

We are now ready to formulate Aumann‘s condition for BI. It is represented by the event

CB(PAS 1 KOS 1 SR).

 16

Aumann (1995) has shown for partitional belief structures that this condition implies the BI

outcome. Our next two theorems show that the special properties of partitional belief structures are

not needed for this result.

Theorem 3. CB(PAS 1 KOS 1 SR) d CB(I)

As in the case of Theorem 1, we clearly can infer from this that CB in PAS, KOS, and SR imply the

BI outcome if all beliefs happen to be veridical. As in the case of Theorem 2, however, much less

than full veridicality of all beliefs is needed. It suffices to add the assumptions „play according to

strategies“ and „knowledge of one‘s own strategy“.

Theorem 4. PAS 1 KOS 1 CB(PAS 1 KOS 1 SR) d I

Clearly, the events considered in Theorems 1 and 2 remain well-defined for belief structures with

strategies. Thus, for belief structures with strategies, we have two different sufficient conditions for

CB in the BI outcome, and two different sufficient conditions for the BI outcome itself. The

conditions not requiring strategies are easily seen to be, respectively, weaker than the ones that do.

Remark 1. CB(PAS 1 KOS 1 SR) d CB(RR 1 CPI)

Remark 2. PAS 1 KOS 1 CB(PAS 1 KOS 1 SR) d RR 1 CB(RR 1 CPI)

 17

Remark 3. Unless Z is a singleton, there is a belief structure with strategies such that the inclusions

of both Remark 1 and 2 are strict.

6. Forward Belief

Finally, we show that the condition for BI play formulated in Theorem 2 can be further weakened

by using the notion of forward belief. The underlying observation is that the informal BI argument

nowhere depends on players‘ beliefs about their predecessors in the game tree, but only on beliefs

about their successors‘ beliefs about their successors beliefs, and so on. This idea has been explored

by Balkenborg and Winter (1997) in Aumann‘s framework (i.e. with partitional belief structures

and strategies at all states), and in slightly different frameworks by Rabinowicz (1998) and Sobel

(1998).

To define forward belief for general belief structures, let (v0, v1, ..., vm) be the path from the origin

to the immediate predecessor of v, i.e., v0á(vm), and vì+10á(vì) for ì=0,...,m-1. Let qv=(i0, i1, ..., im)

be the corresponding sequence of players, i.e., iì=i(vì) for all ì, and let Qv be the set of all (non-

empty) subsequences of q v . (For instance, if q v =(1,2,3), we have Q v ={(1,2,3),

(1,2),(1,3),(2,3),(1),(2),(3)}.

Forward belief prior to node v in event E is then taken to be the following event:
 18

Theorem 5:

7. Discussion and Related Literature

7.1. Conditional possibility of non-BI moves

In Theorems 1, 2 and 5 no conditional possibility of non-BI moves is assumed. In a sense, this is

how it should be, as the BI argument for a given game yields the same outcome when some non-BI

moves are considered impossible by the players. Nevertheless there are several questions that arise

about conditional possibility of non-BI moves.

First of all, it might be suspected that identities analogous to Theorems 1 and 2 hold when the BI

profile é is replaced by some other profile s. Does CB in relative rationality and conditional

possibility of all moves of some arbitrary strategy profile s imply CB in the outcome induced by s?

The following example shows that the answer is negative.

 19

For the game of Figure 1, with VI={v0, a2}, VII={a1}, and Z={a3, d1, d2, d3}, consider the following

belief structure: Ù={2,3}, o(2)={d1}, o(3)={a3}, KI(2)=KII (2)={2}, KI (3)=KII (3)={2,3}. Define the

profile s by s(v0)=d1, s(a1)=a2, s(a2)=a3, and conditional possibility of the moves specified by s as

follows:

It is easy to check that in this belief structure Ù = RR 1 CB(RR 1 CP(s)), but at state 3, the outcome

is not the one induced by s, and there is no CB in that outcome either.

The example also shows that a relatively rational agent may well consider possible more than one

of his moves at a given node. It is also easy to show that his opponents can believe that he is both

relatively rational and considers all his moves (at reached nodes) possible. However, there is an
 20

interesting asymmetry between beliefs about oneself, and beliefs about others: An agent cannot

(typically) believe of himself that he is both relatively rational and considers all his moves (at

reached nodes) possible. Prima facie it may seem natural to strengthen the condition of CB in

relative rationality and conditional possibility of BI moves by requiring conditional possibility of all

moves, that is, by replacing the event CPI by the event CP, defined as follows:

However, except for trivial games, the event CB(RR1CP) is clearly empty: As soon as there is CB

in the BI outcome, there must also be CB that no move off the BI path will be made, so that no

agent can consistently believe that he considers his (single-move) deviations from the BI path

possible. For the condition of Theorem 5, which implies the BI outcome, but not CB in it, the

situation is different.We show that, for the simple Centipede game of Figure 3, there is a belief

structure such that

 21

The required belief structure can be defined as follows: Ù={d1, d2, d3, a3 }, o(ù)/ù, and

KI(d1 )={d1 ,d 2 }, KII(d 1 )={d 1 }, KI(d2 )={d 2 }, KII(d2)={d2, d3}, KI(d3)={d3, a3}, KII(d3)={d3 },

KI(a3)=KII(a3)={a3}, as visualized in the diagram of Figure 4, where the circles are the states, and

an arrow with label i from state ù to state ù‘ indicates that ù‘0Ki(ù).

 22

One can check that d10 RR 1 CP 1 _v FBv(RRv1CPv). At this state, player I ends the game

immediately with d1, but he also considers possible that he might be in a state where he moves

across to a1 and considers d2 as the only possible outcome. He also thinks that in that second state,

player II, while she actually plays down to d2, also considers possible to move across, and so on. In

state a3, where no BI move is made, both players are relatively rational simply because, in that

hypothetical state, which no-one considers possible in d1, only playing across is considered possible

by both players.

Somewhat surprisingly, the situation is again different in a game where a player moves twice along

the BI path. To see this, consider the game of Figure 2 again. In a state where the condition of

Theorem 5 holds, player I believes [a1]6[a3], i.e., the only outcome he considers possible after a1 is

a3. As the latter is the actual outcome in the state considered, and a2 is therefore reached, conditional

possibility of d3 cannot be consistently required on top of the condition of Theorem 5. For any belief

structure for the game of Figure 2, the seemingly quite natural event RR 1 CP 1 _v FBv(RRv1CPv)

is empty.

There is a way out of this problem, if one distinguishes between a player‘s beliefs at his different

decision nodes. A player can then believe now that his beliefs at a later stage of the game would be

different from what he believes now. In order to adapt our framework accordingly, one could define

a modified belief structure that specifies a distinct possibility correspondence for each decision

node. As this is formally identical to a general belief structure for a game where each player has

only one decision node, we confine ourselves here to the following remark.
 23

Remark 4. For any PI game where each player has only one decision node (such that we may set

N=V, and denote the only element of Vi by i), there is a belief structure such that

As the event in this remark is clearly a subset of the one in Theorem 5, we can formulate the

following condition for BI: If each player, at any of his nodes, is relatively rational, considers, if the

node is reached, all his moves at that node possible, and if this is CB among all his respective

opponents (including himself at his other nodes), then the BI outcome must result.

7.2. The timing of beliefs

Aumann interprets the knowledge of his condition for BI as pertaining to a time before the game

starts. This is certainly a feasible interpretation for the conditions of the theorems in the present

contribution. However, the previous discussion indicates that it might be more natural to allow for

different beliefs at different nodes of a player, and to interpret a player‘s beliefs at a node as the

beliefs he would hold when the node is reached - if it were reached. After all, for the player at the

origin of the tree the relevant considerations are about later players‘ beliefs at the time when they

have to act - rather than what they believe before the game starts. Moreover, if a player‘s beliefs for

his different nodes are distinct, they cannot (all) be actual beliefs, but (some of them) must be

regarded as hypothetical. At least, the implicit assumption that players do not change their beliefs

seems to be required for Aumann‘s interpretation. As we have seen, this assumption may be
 24

inconsistent with otherwise natural conditions such as the ones of the preceding discussion.

It is worth emphasizing that the time when beliefs are held must also be one where all relevant

reasoning has been completed. However, it is not unambiguously clear what should count as

„relevant“ reasoning. In particular, reasoning about one‘s own rationality seems to be relevant only

insofar as it pertains to one‘s future selves or to others‘ beliefs about it. In order to act rationally, a

player has to think about his own rationality at possible future occasions, and also about what later

players will believe about his rationality, but he does not need to draw all conclusions from the

assumption that he is rational at the present occasion. Our Theorem 5 shows that the BI argument

is in fact valid for players who do not think about their own (present) rationality or about what they

(at present) consider possible. The beliefs in conditions such as those of Theorem 5 or Remark 4

can therefore be taken to be held at a time before players have thought about the implications of

their respectively own (present) rationality - but after they have exploited all the other relevant

information.

By contrast, the conditions of Theorems 1 through 4 pertain to players after they have also thought

through all the implications of their own rationality, and have reached common full belief in what

is going to happen - including what their respectively own actions are going to be.
 25

7.3. Syntactic frameworks

Instead of the semantic state-space used here, conditions for BI can alternatively be analysed in a

syntactic framework. Thus the notions of relative rationality and conditional possibility of BI moves

have been introduced in Vilks (1999), where the epistemic logic KTn is used. (Cf. Fagin, Halpern,

Moses, and Vardi, 1995 for various systems of multi-agent epistemic logic.) Essentially, KTn

corresponds to requiring possibility correspondences to be reflexive, i.e., to satisfy ù0Ki (ù) for all

ù, which implies the „veridicality axiom“ Bi(E)dE. In the language of the present framework, the

results in Vilks (1999) say that for veridical beliefs the following holds:

CB(PAS 1 KOS 1 SR) d CB(RR 1 CPI) d I.

In a formal epistemic logic with counterfactual conditionals, Clausing (1999) has proved a variant

of Theorem 4, thus showing that the veridicality axiom (which, in the by now standard terminology,

distinguishes knowledge from belief) is inessential for Aumann‘s version of the BI argument.

A further difference between the state-space approach of the present paper and the authors‘ previous

syntactic work is that the latter requires explicit conditions representing the players‘ knowledge or

beliefs about the structure of the game. In the present paper we follow the main strand of the

literature in considering only belief structures for a given game. By doing so one is implicitly

assuming common knowledge of the players‘ payoff-functions, and of the fact that some path

through the given game will be played in each and every possible state of the world.
 26

7.4. Belief structures derived from subjective probabilities.

Brandenburger (1999) notes that „there has been a long-standing intuition that, simply as a

theoretical matter, probabilities play an inessential role in [PI] games“. In fact, probabilistic

considerations do not play any role in the conditions for BI considered above. Of course,

probabilistic beliefs may be added to a given belief structure, and if this is done, there are some

natural restrictions one would like to impose. If ìi(ù) denotes player i‘s probability measure in state

ù, one would require that supp(ìi(ù)) d Ki(ù). However, there is no need to assume that subjective

possibility implies positive probability. As in the case of continuous random variables there may

well be an event E which is considered possible (E1Ki(ù)…i), but assigned probability zero

(ìi(ù)(E)=0). Conversely, there may well be events which are believed with probability one

(ìi(ù)(E)=1), but not fully believed (ùóBi(E)).

As the literature nevertheless often identifies „full belief“ with „belief with probability one“, we

briefly indicate how to generate belief structures warranting this identification from given

probabilistic beliefs. If we start with a finite Ù, an outcome function o:Ù6Z, and for each player i

a mapping ìi from Ù to the set of probability measures on Ù, we interpret ìi(ù)(E) as the degree of

belief player i has in event E when the true state is ù. We can then define a belief structure by

taking Ki(ù) to be the support of ìi(ù). The event Bi(E) is then the set of all states at which i

assigns probability 1 to E, and ~Bi(~E) the set of all states at which i assigns positive probability to

E.
 27

In a framework of this kind, Ben-Porath‘s (1997) notion of common certainty CC of an event E can

be defined as

CC(E):= E 1 CB(E),

and we can express (an immediate corollary to) our Remark 2 as

CC(PAS 1 KOS 1 SR) d CC(RR 1 CPI) d I.

8. Proofs

The following lemmas can be easily proved from the definitions of the belief and common belief

operators.

Lemma 1. Bi(Ù)=Ù, and Bi(i)=i.

Lemma 2. If EdF, then Bi(E)dBi(F).

Lemma 3. Bi(E)1Bi(F)=Bi(E1F).

Lemma 4. Bi(E)d~Bi(~E).

Lemma 5. CB(Ù)=Ù.

Lemma 6. If EdF, then CB(E)dCB(F).

Lemma 7. CB(E)1CB(F) = CB(E1F).

Lemma 8. CB(E) = CB(CB(E)) d CB(Bi(E)) d Bi(E).

 28

The following is immediate from the definitions of é and â.

Lemma 9. For all v0V: â(v)=â(é(v)).

Theorem 1 is a consequence of the following lemma.

Lemma 10. For any v0X, CB(RR1CPI) d CB([v]6[â(v)]).

Proof of Lemma 10. Consider a decision node v0Vi, and assume that the assertion of the lemma is

true for all v’0á(v). Note that this assumption must hold for any node where only terminal moves

are possible. Thus:

CB(RR1CPI) d 1v’0á(v) CB ([v’]6[â(v’)]),

hence, by Lemmas 7, 8 and 9, it follows for any v-0á(v) with v-…é(v) that

(1) CB(RR1CPI) d CB{Bi([é(v)]6[â(v)]) 1 Bi([v-]6[â(v-)])}.

As ði(â(v))>ði(â(v-), we also have, from the definition of RR,

RR d Bi([é(v)]6[â(v)]) 1 Bi([v-]6[â(v-)]) 1 ~Bi~[é(v)] 6 ~[v-],

 29

and from the definition of CPI,

CPI d [v]6~Bi~[é(v)].

Combining the latter two inclusions, and using the fact that (E1F6G)1(H6F) d H6(E6G), we get

RR 1 CPI d [v]6{Bi([é(v)]6[â(v)]) 1 Bi([v-]6[â(v-)]) 6 ~[v-]},

and applying Lemma 6, we get

CB(RR 1 CPI) d CB([v]6{Bi([é(v)]6[â(v)]) 1 Bi([v-]6[â(v-)]) 6 ~[v-]}).

Combining this with (1), using the fact that E1(F6(E6G)) d F6G, and Lemma 6 again, we get

CB(RR 1 CPI) d CB([v] 6 ~[v-])

As this holds for all v-0á(v) with v-…é(v), and [v]6 ^w0á(v)[w] =Ù, it follows by Lemmas 5, 6, and 7

that

CB(RR 1 CPI) d CB([v] 6 [é(v)]).

As the induction hypothesis implies that

 30

CB(RR 1 CPI) d CB([é(v)] 6 [â(v)]),

we get, using (E6F)1(F6G) d (E6G), that

CB(RR 1 CPI) d CB([v] 6 [â(v)]). Q.E.D.

Lemma 11: CB(I) 1 I d RR

Proof of Lemma 11: We will show

(#) CB(I) 1 I d Bi~[v+] c ~[v-] = (~Bi~[v+]) 6 ~[v-]

for any v+, v-0á(v), with v+…v-, v0Vi. If v-…é(v), (#) follows from I d ~[v-] and Lemma 6. If v-= é(v),

v+…é(v), and thus I d ~[v+], and by lemma 6 and 8 CB(I) d Bi~[v+], which yields (#). Because of

F6G d E1F6G, one finds in particular

CB(I) 1 I d Bi([v+]6[t+]) 1 Bi([v-]6[t-]) 1 (~Bi~[v+]) 6 ~[v-]

for any i, v+, v-0á(v), t+, and t- with v+…v-, which yields the result. Q.E.D.

Lemma 12: CB(I) d CB(CPI)

 31

Proof of Lemma 12: We have to show that

(**) CB(I) d CB( ~[v] c ~Bi~[é(v)] )

holds for any v0Vi. If v does not belong to the BI path, I d ~[v] d ~[v] c ~Bi~[é(v)] , and (**)

follows by Lemma 6. If v belongs to the BI path, I d [é(v)], and by Lemmas 8, 2, 6, and 4, we get

CB(I) d CB(Bi(I)) d CB(Bi[é(v)]) d CB(~Bi~[é(v)] ) d CB( ~[v] c ~Bi~[é(v)] ).

Thus (**) holds for any v0Vi, and applying Lemma 7 repeatedly yields CB(I)dCB(CPI). Q.E.D.

Proof of Theorem 1. As [v 0 ]=Ù, we have, [v 0 ]6[â(v 0 )]=I. Hence, by Lemma 10,

CB(RR1CPI)dCB(I). To prove the converse, note that Lemmas 6, 7, 8, and 11 yield CB(I)d

CB(CB(I)1I)dCB(RR). Together with Lemmas 12 and 7, this gives CB(I)dCB(RR1CPI). Q.E.D.

Proof of Theorem 2. Let v0Vi, and v-0á(v), v-…é(v). As ði(â(v))>ði(â(v-)), the definition of RR

implies:

RR d Bi([é(v)]6[â(v)]) 1 Bi([v-]6[â(v-)]) 1 ~Bi~[é(v)] 6 ~[v-]

while Lemma 10 implies

 32

CB(RR1CPI) d Bi([é(v)]6[â(v)]) 1 Bi([v-]6[â(v-)]).

Using the fact that (E1F6G) 1 E d F6G, the latter two inclusions yield

RR 1 CB(RR 1 CPI) d ~Bi~[é(v)] 6 ~[v-].

For any decision node v on the BI path, we get, from Theorem 1, and Lemmas 4, 6, and 8

CB(RR 1 CPI) d CB(I) d Bi[é(v)] d ~Bi ~[é(v)].

Thus, for any v- that can be reached by one deviation from the BI path, we have

RR 1 CB(RR 1 CPI) d ~[v-].

Denote by D the set of all nodes reached by one deviation from the BI path. As can be shown by a

simple induction, _v-0D ~[v-]=I. We thus get RR 1 CB(RR 1 CPI) d I, and by Theorem 1

RR 1 CB(RR 1 CPI) d CB(I) 1 I. The converse follows from Theorem 1 and Lemma 11. Q.E.D.

Theorem 3 is an immediate consequence of the following lemma.

Lemma 13. For any v0X, CB(PAS 1 KOS 1 SR) d CB([v]6[â(v)]).

 33

Proof of Lemma 13. Consider a decision node v0Vi, and assume that the assertion of the lemma is

true for all v’0á(v). Thus

CB(PAS 1 KOS 1 SR) d 1v’0á(v) CB([v’]6[â(v’)]).

We show that this implies

PAS 1 KOS 1 SR 1 CB(PAS 1 KOS 1 SR) d [v]6[é(v)].

Assume to the contrary, that there is a state ù0Ù such that

ù 0 PAS 1 KOS 1 SR 1 CB(PAS 1 KOS 1 SR) 1 [v] 1 ~[é(v)].

At this state, some v-0á(v), v-…é(v) must be reached. I.e., for some such v-,

ù 0 PAS 1 KOS 1 SR 1 CB(PAS 1 KOS 1 SR) 1 [v] 1 [v-].

As PAS 1 [v] 1 [v-] d [s(v)=v-] (where [s(v)=v-]:={ù| s(ù)(v)=v-}),

and KOS d [s(v)=v-]6Bi([s(v)=v-]), it follows that

ù 0 PAS 1 KOS 1 SR 1 CB(PAS 1 KOS 1 SR) 1 Bi([s(v)=v-])

 34

By the induction hypothesis, it follows that

ù 0 PAS 1 KOS 1 SR 1 CB(PAS 1 KOS 1 SR) 1 Bi([ðvi(éi, s-i)>ðvi(s)].

However, by definition of substantive rationality, SR 1 Bi([ðvi(éi, s-i)>ðvi(s)] = i. Thus, we have

PAS 1 KOS 1 SR 1 CB(PAS 1 KOS 1 SR) d [v]6[é(v)].

Using Lemmas 6 and 8, we get

CB(PAS 1 KOS 1 SR) = CB(PAS 1 KOS 1 SR 1 CB(PAS 1 KOS 1 SR)) d CB([v]6[é(v)]),

whence, by the induction hypothesis,

CB(PAS 1 KOS 1 SR) d CB([v]6[é(v)]) 1 CB([é(v)]6[â(v)]) d CB([v]6[â(v)]). Q.E.D.

Proof of Theorem 3. Let v=v0 in the Statement of Lemma 13, and note [v0]6[â(v0)]=I. Q.E.D.

Proof of Theorem 4. Assume that contrary to the assertion of the theorem, there is a state

ù0PAS1KOS1CB(PAS1KOS1SR)1~I. Let D be defined as in the proof of Theorem 2, so that

~I=^v-0D[v-]. Then ù0[v-] must hold for some v-0D. Let v0Vi be such that v-0á(v). Because of

ù0PAS, si(ù)(v)=v-. Clearly, [si(v)=v-]1PASd[v]6[v-]. Thus by the definition of KOS, and Lemmas
 35

6, 7 and 8 we have ù0KOS1CB(PAS) d Bi([si(v)=v-]1PAS) d Bi([v]6[v-]). Furthermore,

Id[v]1~[v-]. By Theorem 3 and Lemma 8 and 6, ù0CB(I)dBi(I) d Bi([v]1~[v-]). Because of

[v]1~[v-]1([v]6[v-])=i, Lemmas 6 and 1 yield ù0Bi(i) =i. Q.E.D.

Proof of Remark 3. Consider a structure where Ù={ù}, o(ù)=â(v0), Ki(ù)=Ù for all i, and s(ù)…é.

As can be easily checked, PAS1KOS1CB(PAS1KOS1SR)=CB(PAS1KOS1SR)=i, and

RR1CB(RR1CPI)=CB(RR1CPI)=Ù. Q.E.D.

To prove Theorem 5, we need the following generalization of the forward belief operator. Let (v1,

v2, ..., vm) be the path from node v1 (not necessarily the origin) to the immediate predecessor of v,

i.e., v0á(vm), and vì+10á(vì) for ì=1,...,m-1. Let qvv1=( i1, i2, ..., im ) be the corresponding sequence

of players, i.e., iì=i(vì) for all ì, and let Qvv1 be the set of all (non-empty) subsequences of qvv1. We

then define:

We will also make use of the following lemmas.

Lemma 14. For any v0Vi:

 36

Lemma 15. For any w>u:

Proofs of Lemmas 14 and 15 are left to the reader.

Lemma 16. For any u0Vi and any w>u:

Proof of Lemma 16. Assume the assertion is true for all u‘>u, u‘0V. (If á(u)1V=i, the assertion

must be true as w>u then implies w=â(w), and thus [w]6[â(w)]=Ù.) Thus, if u‘0Vi‘

for all decision nodes w‘>u‘, and in particular for w‘0á(u‘). Thus we get
 37

Applying Lemma 2, this gives

As

we get

Moreover,

From the last two inclusions we get, by Lemmas 3, 14, and 2:

 38

As this holds for all u‘>u, we get

and Lemma 15 yields

for any w>u. Q.E.D.

Proof of Theorem 5. First, observe that for any u0V, the following holds:

Thus, whenever w>u for some u0Vi, Lemma 16 implies

 39

In particular, for an arbitrary u0Vi, we can take w0á(u). Doing so, we infer

Using Lemma 14, we now infer

As this holds for any u0V, we get

Q.E.D.

Proof of Remark 4. Let v#w stand for v<w or v=w. Consider the following belief structure

(Ù,o,(Ki)) can be defined as follows.

Ù:=Z,

o(t)/t, and

t‘0Ki(t) iff one of the following two conditions is satisfied:

 40

(i) é(i)#t and t‘=â(a) for some a0á(i), or

(ii) not é(i)#t, and t‘=t.

We have to show that, for any i0N:

â(vo) 0 RRi 1 CPi 1 CBN\{i}(RRi 1 CPi ).

Let é(i)#t. Then Ki(t)= {â(a): a 0 á(i)}, which implies t0CPi and t0Bi([a]6[â(a)]) for all a0á(i).

Because of ði(â(é(i))>ði(â(a)) for all a0á(i)\{é(i)}, the latter implies t0RRi. Furthermore, if i<t does

not hold, t0CPi and t0RRi trivially hold. This gives â(v0)0RRi1CPi.

For any set of states X, define Kj(X) as the union of Kj(t) for all t in X. As is well known,

t0CBN\{i}(E) if and only if Kj(...Kk(t)...)dE for all sequences j,...,k in N\{i}. We will show for any t

0Kj(...Kk(â(v0))...), where j,...,k is a sequence in N\{i}, that either é(i)#t or not i<t holds. This is

clearly the case for t0{â(v0)}. Now assume our claim has been shown for all sequences of length n

and let t0Kj(Kl(...Kk(â(v0))...)), where j,l,..,k is a sequence of length n+1. If not i<t, we are done.

Otherwise, note that there must be some t'0Kl(...Kk(â(v0))...) with t0Kj(t') and j<t' or t=t'. In the latter

case, the induction hypothesis yiels é(i)#t. In the former case, we have j<t=â(a) for some a0á(j).

Thus j<i implies é(i)#t, and i<j implies i<t', in which case the induction hypothesis yields é(i)#j<t.

As shown above, we thus have Kj(...Kk(â(v0))...) in RRi1CPi for any sequence j,..,k in N\{i}, which

gives â(v0)0CBN\{i}(RRi1CPi). Q.E.D.

 41

References

Aumann, R. (1995), "Backward Induction and Common Knowledge of Rationality," Games and

Economic Behavior 8: 6-19.

Balkenborg, D. and Winter, E. (1997), “A necessary and sufficient epistemic condition for playing

backward induction,” Journal of Mathematical Economics 27, 325-345 .

Ben-Porath, E. (1997), „Rationality, Nash Equilibrium and Backwards Induction in Perfect-

Information Games“, Review of Economic Studies 64:23-46.

Brandenburger, A. (1998), „On the Existence of a ‚Complete‘ Belief Model“, HBS Working Paper

99-056.

Clausing, T. (1999), The Logical Modeling of Reasoning Processes in Games, doctoral thesis,

Leipzig Graduate School of Management (HHL).

Fagin, R., Halpern, J., Moses, Y., and Vardi, M. (1995), Reasoning about Knowledge, Cambridge

(MA): The MIT Press.

Kramarz, F. (1993), „How agents plan their actions in games: a model of players‘ reasoning with

common knowledge of rationality“, ENSAE/INSEE Working Paper 9322.

Rabinowicz, W. (1997), “Grappling with the Centipede: Defence of Backward Induction for BI-

terminating Games,” Economics and Philosophy 14: 95-126.

Sobel, H. J. (1998), “Terminating a Centipede: Backward Induction Solutions and Resolutions,”

mimeo.

Vilks, A. (1999), “Knowledge of the Game, Relative Rationality, and Backwards Induction“,

Leipzig Graduate School of Management (HHL) Working Paper 25.