Rational Rules of Thumb in Finite Dynamic Games N-person Backward Induction with Inconsistently Aligned Beliefs and Full Rationality

Abstract

Recent work has cast considerable doubt on the plausibility of specific assumptions about how rational agents form out-of-equilibrium beliefs in finite extensive games in which beliefs are induced backwards. The point is that the resulting consistently aligned beliefs are incoherent in view of the counterfactuals they rely on. This study asks: How will the possibility of inconsistently aligned beliefs affect the manner in which rational players play such games? It shows that, provided beliefs are aligned monotonically, the more interesting qualitative features of the conventional approach remain unchanged.