On the Use of Mindreading and Mindshaping in Game Theory: Incorporation of Players’ Mental States and Endogenization of Players’ Beliefs

Chapter 6 offers a formal contribution to game theory with the integration of simulation theory and mindshaping in games. The aim in this chapter is to propose a psychological theory of the formation of players’ prior beliefs with simulation theory and mindshaping, and we examine the conditions that allow players’ representations and beliefs to converge to an equilibrium and ultimately enable coordination. We discuss how a particular equilibrium occurs, and in the game model proposed in this chapter, we offer enhancements to standard noncooperative game theory as proposed by Schelling and Bacharach. We argue in this chapter that the integration of the players’ reasoning process and mental states requires consideration of the strategic decision problem as an open system. This means that standard Bayesian decision theory, which considers the strategic decision problem a closed system, is no longer applicable. The approach used in this chapter to close the universe relies conceptually on Bacharach’s VFT and Savage’s distinction between small and large worlds. We assume that some features of the decision problem are more salient than others, and the players are guided by those salient features to frame the initial large world as a tractable problem—a small world—which allows the use of Bayesian methods.