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Game Theory Without Partitions, and Applications to Speculation and Consensus

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Abstract

Decision theory and game theory are extended to allow for information processing errors. This extended theory is then used to reexamine market speculation and consensus, both when all actions (opinions) are common knowledge and when they may not be. Five axioms of information processing are shown to be especially important to speculation and consensus. They are called nondelusion, knowing that you know, nested, balanced, and positively balanced. We show that it is necessary and sufficient that each agent's information processing errors be nondeluded and (1) balanced so that the agents cannot agree to disagree, (2) positively balanced so that it cannot be common knowledge that they are speculating, and (3) KTYK and nested so that agents cannot speculate in equilibrium. Each condition is strictly weaker than the next one, and the last is strictly weaker than partition information.

Suggested Citation

  • John Geanakoplos, 1989. "Game Theory Without Partitions, and Applications to Speculation and Consensus," Cowles Foundation Discussion Papers 914, Cowles Foundation for Research in Economics, Yale University.
    • Handle: RePEc:cwl:cwldpp:914
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    1. Cave, Jonathan A. K., 1983. "Learning to agree," Economics Letters, Elsevier, vol. 12(2), pages 147-152.
    2. Monderer, Dov & Samet, Dov, 1989. "Approximating common knowledge with common beliefs," Games and Economic Behavior, Elsevier, vol. 1(2), pages 170-190, June.
    3. Dubey, Pradeep & Geanakoplos, John & Shubik, Martin, 1987. "The revelation of information in strategic market games : A critique of rational expectations equilibrium," Journal of Mathematical Economics, Elsevier, vol. 16(2), pages 105-137, April.
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