Abstract:

The literature on Nash equilibrium refinements provides several ways to check the stability of a Nash equilibrium against deviations from equilibrium play. Stability, however, is a function of how a deviation is being interpreted. An equilibrium that is stable under one interpretation may cease to be stable under another, but the refinement literature provides no general criterion to judge the plausibility of different interpretations of off-equilibrium play. This paper specifies a model of belief revision that minimizes the loss of useful information. When several interpretations are compatible with off-equilibrium play, the one that requires the least costly belief revision (in terms of informational value) will be chosen by the players. This model of belief revision generates a plausibility ranking of interpretations of deviations, hence it also provides a ranking of Nash equilibrium refinements.