Modelling Equilibrium Play as Governed By Analogy and Limited Foresight

This paper proposes a bounded rationality approach to model equilibrium play in games. It is based on the observation that decision makers often do not seem to fully distinguish between different but seemingly similar decisions. To capture this, for each player a similarity grouping of decisions is defined based on equality of available actions and analogy of locally foreseen subtrees. The considered equilibrium concept is a (trembling-hand) perfect Nash-equilibrium (Selten, 1975) in which players are required to choose the same behaviour for similar decisions. Based on the approach, it is shown how the Chain Store Paradox (Selten, 1978) can be resolved, and how mixed equilibria in the Centipede Game (Rosenthal, 1981) can be rationalised