Economics 409:

Game Theory

Beliefs, Best Response, and Rationalizability

Example of IESDS: Soda Vendors at the Beach

I Two soda vendors must simultaneously choose their locations

on the beach
I Five customers are distributed evenly across five locations on
the beach
I Customers patronize the vendor nearest them
I Each patron yields profit of $1 per day
Which locations would the soda vendors choose?
IESDS: Soda Vendors at the Beach

1 2 3 4 5
1 2.5, 2.5 1, 4 1.5, 3.5 2, 3 2.5, 2.5
2
3
4
5
IESDS: Soda Vendors at the Beach

1 2 3 4 5
1 2.5, 2.5 1, 4 1.5, 3.5 2, 3 2.5, 2.5
2 4, 1 2.5, 2.5 2, 3 2.5, 2.5 3, 2
3 3.5, 1.5 3, 2 2.5, 2.5 3, 2 3.5, 1.5
4 3, 2 2.5, 2.5 2, 3 2.5, 2.5 4, 1
5 2.5, 2.5 2, 3 1.5, 3.5 1, 4 2.5, 2.5
The Election Game

I Voters are located on a left-to-right ideological scale

I Two political candidates; each chooses a policy promise from
left to right
I Each voter votes for the candidate closest to her ideological
preference; majority rules

Median Voter Theorem: If the candidates care only about vote

shares, the unique IESDS outcome is for both to cater to the
policy preference of the median voter.
Overview

I A formal definition of rationality based on beliefs and best

responses

I Rationalizability: a consequence of common knowledge of

rationality
Belief
We can ask a player
“what were you thinking when you made your choice?”
For example, in a PD (prisoners’ dilemma), a player may say
“I think the other player will play D”
Belief
We can ask a player
“what were you thinking when you made your choice?”
For example, in a PD (prisoners’ dilemma), a player may say
“I think the other player will play D”

I Formally, a belief of player i is a possible profile of her

opponents’ strategies, s−i ∈ S−i .
Belief
We can ask a player
“what were you thinking when you made your choice?”
For example, in a PD (prisoners’ dilemma), a player may say
“I think the other player will play D”

I Formally, a belief of player i is a possible profile of her

opponents’ strategies, s−i ∈ S−i .

I Here the belief is “deterministic” (we will generalize this later

to allow probabilistic beliefs)
I # of player i’s possible beliefs = # of elements in S−i

I Note: A player’s belief may not be the same as what her

opponents will actually choose
Best Response: Definition

I The strategy si ∈ Si is player i’s best response to his belief

about her opponents’ play s−i ∈ S−i if

vi (si , s−i ) ≥ vi (si0 , s−i ), for all si0 ∈ Si .

I We will often say si is a best response to (her belief) s−i

Best Response: Definition

I The strategy si ∈ Si is player i’s best response to his belief

about her opponents’ play s−i ∈ S−i if

vi (si , s−i ) ≥ vi (si0 , s−i ), for all si0 ∈ Si .

I We will often say si is a best response to (her belief) s−i

I There can be more than one best responses to some belief
L C R
U 4, 3 5, 1 6, 2
M 2, 1 8, 4 3, 6
D 4, 0 9, 6 2, 8
Best Response: Properties

I A rational player with belief s−i will always choose a best

response to s−i
I rationality = “maximize payoff given belief”

I A strictly dominated strategy cannot be a best response to

any belief
I a weakly (but not strictly) dominated strategy can be a best
response to some belief

I If a game has a dominant strategy equilibrium s ∗ = (si∗ , s−i

∗ ),

then si∗ is a best response to s−i

∗
Best Response Correspondence

I More systematically, for each player, we can keep track of her

best responses to her all possible beliefs

I The best response correspondence of player i selects for

each s−i ∈ S−i a subset BRi (s−i ) ⊂ Si where every
si ∈ BRi (s−i ) is a best response to s−i
Best Response Correspondence

I More systematically, for each player, we can keep track of her

best responses to her all possible beliefs

I The best response correspondence of player i selects for

each s−i ∈ S−i a subset BRi (s−i ) ⊂ Si where every
si ∈ BRi (s−i ) is a best response to s−i

I The best response correspondence BRi (·) is a function if it is

always a singleton set for every s−i

I “Player i is rational” = BRi (·)

Practice: I

L C R
U 3, 3 5, 1 6, 2
M 4, 1 8, 4 3, 6
D 4, 0 9, 6 6, 8
What is player 1’s best response correspondence?

What is player 2’s best response correspondence?

Practice: II

L C R
U 5, 1 0, 4 1, 0
M 3, 1 0, 0 3, 5
D 3, 3 4, 4 2, 5
Rationalizability

I Rationality of player i: BRi (·)

Rationalizability

I Rationality of player i: BRi (·)

I A strategy si ∈ Si is never a best response if there is no
belief s−i ∈ S−i such that si ∈ BRi (s−i )
Rationalizability

I Rationality of player i: BRi (·)

I A strategy si ∈ Si is never a best response if there is no
belief s−i ∈ S−i such that si ∈ BRi (s−i )
I If player j knows that player i is rational, then j knows that i
will not play strategies that are never a best response
Rationalizability

I Rationality of player i: BRi (·)

I A strategy si ∈ Si is never a best response if there is no
belief s−i ∈ S−i such that si ∈ BRi (s−i )
I If player j knows that player i is rational, then j knows that i
will not play strategies that are never a best response
I Like IESDS, when we assume common knowledge of
rationality, we can build an iterative process
I in each step, eliminate strategies that are never a best response
I stop when we cannot further eliminate any strategies
I The set of strategy profiles that survive this process is called
the set of rationalizable strategy profiles
Application: The Guessing 2/3 Game

I Ai = {0, 1, . . . , 20}
Application: The Guessing 2/3 Game

I Ai = {0, 1, . . . , 20}
I IESDS is not very useful in this game
I for example, 20 is not strictly dominated by 19!
Application: The Guessing 2/3 Game

I Ai = {0, 1, . . . , 20}
I IESDS is not very useful in this game
I for example, 20 is not strictly dominated by 19!
I Let’s consider best response and rationalizability
I 20 is never a best response
Application: The Guessing 2/3 Game

I Ai = {0, 1, . . . , 20}
I IESDS is not very useful in this game
I for example, 20 is not strictly dominated by 19!
I Let’s consider best response and rationalizability
I 20 is never a best response
I we can eliminate 20 based on rationalizability
Application: The Guessing 2/3 Game

I Ai = {0, 1, . . . , 20}
I IESDS is not very useful in this game
I for example, 20 is not strictly dominated by 19!
I Let’s consider best response and rationalizability
I 20 is never a best response
I we can eliminate 20 based on rationalizability
I we are left with {0, 1, . . . , 19} for each player
I now 19 is never a best response
Application: The Guessing 2/3 Game

I Ai = {0, 1, . . . , 20}
I IESDS is not very useful in this game
I for example, 20 is not strictly dominated by 19!
I Let’s consider best response and rationalizability
I 20 is never a best response
I we can eliminate 20 based on rationalizability
I we are left with {0, 1, . . . , 19} for each player
I now 19 is never a best response
I iterating this process, we end up with {0, 1}
I The set of rationalizable strategies for player i is {0, 1}
Summary

I Rationality can be formally described as playing a best

response to some belief

I The implication of common knowledge of rationality is

rationalizability