Strategic cautiousness as an expression of robustness to ambiguity

Ziegler, Gabriel; Zuazo-Garin, Peio

Strategic cautiousness as an expression of robustness to ambiguity

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Ziegler, G, Zuazo-Garin, P. Strategic cautiousness as an expression of robustness to ambiguity. 2019. handle: http://hdl.handle.net/10230/44765

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Abstract

Economic predictions often hinge on two intuitive premises: agents rule out the possibility of others choosing unreasonable strategies ( strategic reasoning ), and prefer strategies that hedge against unexpected behavior ( cautiousness ). These two premises conflict and this undermines the compatibility of usual economic predictions with reasoning-based foundations. This paper proposes a new take on this classical tension by interpreting cautiousness as robustness to ambiguity. We formalize this via a model of incomplete preferences, where (i) each player s strategic uncertainty is represented by a possibly non-singleton set of beliefs and (ii) a rational player chooses a strategy that is a best-reply to every belief in this set. We show that the interplay between these two features precludes the conflict between strategic reasoning and cautiousness and therefore solves the inclusion-exclusion problem raised by Samuelson (1992). Notably, our approach provides a simple foundation for the iterated elimination of weakly dominated strategies