(7) Perfect Bayesian Equilibrium

Question 1

Perfect Bayesian Equilibrium - Definition

Answer 1

• Leads to sequential rationality: Players can expect that all players who move later in the game will make optimal choices

Question 2

Why do we need Perfect Bayesian Equilibrium?

Answer 2

• NE has drawbacks in sequential move games and subgame-perfect equilibrium has no bite in incomplete information games

Question 3

How does Perfect Bayesian Equilibrium work?

Answer 3

• At every singleton in a game the relevant player chooses optimally given the other players assumed strategies
• At every information set with more then one decision node the relevant player forms a belief about which decision node has been reached and chooses rationally according to this belief
• If such a information set is reached with zero probability the information set is off the equilibrium path (we apply Bayes’ rule whenever possible, otherwise arbitrary belief)