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Returns-Based Beliefs and The Prisoner’s Dilemma

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  • Velu, C.
  • Iyer, S.

Abstract

Returns-based beliefs provides an explanation for the anomaly between the theory and empirics for the one-shot and finitely-repeated Prisoner’s Dilemma games. Even in a fully specified game, there is strategic uncertainty as players attempt to coordinate their actions. Therefore players form subjective probabilities of the actions of their opponents. We provide a new method termed the ‘returns-based beliefs’ approach of forming subjective probabilities that is based upon the expected returns of a particular strategy, in proportion to the total expected returns of all strategies. This method can be applied even in the absence of knowledge of the players’ respective histories.

Suggested Citation

  • Velu, C. & Iyer, S., 2008. "Returns-Based Beliefs and The Prisoner’s Dilemma," Cambridge Working Papers in Economics 0854, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:0854
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    More about this item

    Keywords

    Prisoner’s Dilemma; Rationality; Subjective Probabilities; Returns-Based Beliefs.;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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