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Bayesian Theory of Games: A Statistical Decision Theoretic Based Analysis of Strategic Interactions

Teng, Jimmy (2010): Bayesian Theory of Games: A Statistical Decision Theoretic Based Analysis of Strategic Interactions.

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Abstract

Bayesian rational prior equilibrium requires agent to make rational statistical predictions and decisions, starting with first order non informative prior and keeps updating with statistical decision theoretic and game theoretic reasoning until a convergence of conjectures is achieved.

The main difference between the Bayesian theory of games and the current games theory are:

I. It analyzes a larger set of games, including noisy games, games with unstable equilibrium and games with double or multiple sided incomplete information games which are not analyzed or hardly analyzed under the current games theory.

II. For the set of games analyzed by the current games theory, it generates far fewer equilibria and normally generates only a unique equilibrium and therefore functions as an equilibrium selection and deletion criterion and, selects the most common sensible and statistically sound equilibrium among equilibria and eliminates insensible and statistically unsound equilibria.

III. It differentiates between simultaneous move and imperfect information. The Bayesian theory of games treats sequential move with imperfect information as a special case of sequential move with observational noise term. When the variance of the noise term approaches its maximum such that the observation contains no informational value, there is imperfect information (with sequential move).

IV. It treats games with complete and perfect information as special cases of games with incomplete information and noisy observation whereby the variance of the prior distribution function on type and the variance of the observation noise term tend to zero. Consequently, there is the issue of indeterminacy in statistical inference and decision making in these games as the equilibrium solution depends on which variances tends to zero first. It therefore identifies equilibriums in these games that have so far eluded the classical theory of games.

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