Ambiguity in Games: The Role of Uncertainty in Strategic Interactions

• Applicant: Professor Dr. Frank Riedel
• Subject Area: Economic Theory
• Term: from 2013 to 2017
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 230418795

Uncertainty plays a crucial role in strategic conflicts, either in the form of uncertainty of the environment or uncertainty in strategy choices. In many real--world conflicts, it is not possible to model the uncertainty by probabilistic models; instead, agents face what is called Knightian uncertainty or (model) ambiguity: the probability distribution of outcomes is not exactly known to the actors. In social conflicts, we frequently have environmental variables as past experience, preplay communication, or cultural norms that influence the equilibrium outcome but are not directly part of the modeled payoffs. It is thus important to incorporate such model uncertainty or ambiguity into the analysis of strategic conflicts.The project aims to develop a general theory of such (objective) ambiguity in strategic interactions. Two main themes will be developed. First, in strategic conflicts it is frequently important to create uncertainty as opponents would exploit perfect information about one's behavior to one's own detriment. Traditionally, such strategic uncertainty has been modeled by probabilistic devices with known probabilities, as dices or roulette wheels. In real interactions, a much wider variety of strategic uncertainty is available to players. This is certainly reflected and intuitively felt in the policy literature on negotiations and is known to bargainers alike. We take up recent advances in decision theory that allow to model such uncertainty and study the resulting changes in equilibrium predictions for game theory.Second, the environment might itself be ambiguous. Players might not have sufficient probabilistic information over the game played, the type of the opponents etc as is traditionally assumed. In real environment, information is often scarce and does not allow probabilistic assessments. How does this uncertainty affect the strategies played at equilibrium? Is it possible to parametrize the set of equilibria by the degree of ambiguity of the environment?The aim of the current project is to develop the whole theory of such situations, including its decision--theoretic and epistemological foundations, the extensive form theory, and applications to specific strategic conflicts that are important from an economic point of view. For instance, we intend to study the consequences of our theory for communication games or bargaining situations between economic parties. We will also accompany our studies by experiments to test our predictions in the laboratory.

• DFG Programme: Research Grants
• International Connection: France
• Participating Person: Professor Dr. Jean-Marc Tallon