Bounded Rationality and Robust Mechanism Design: An Axiomatic Approach

We propose an axiomatic approach to study the superior performance of mechanisms with obviously dominant strategies to those with only dominant strategies. Guided by the psychological inability to reason state-by-state, we develop Obvious Preference as a weakening of Subjective Expected Utility Theo...

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Bibliographic Details
Published inThe American economic review Vol. 107; no. 5; pp. 235 - 239
Main Authors Zhang, Luyao, Levin, Dan
Format Journal Article
LanguageEnglish
Published Nashville American Economic Association 01.05.2017
Subjects
Auctions
Axioms
Bounded rationality
Decision theory
Dominant strategy
Dynamic games
Economic models
Equilibrium
Expected utility
Game theory
Mechanism design
MISTAKES IN DOMINANT-STRATEGY MECHANISMS
Nash equilibrium
Rationality
Reason
Utility theory
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Summary:We propose an axiomatic approach to study the superior performance of mechanisms with obviously dominant strategies to those with only dominant strategies. Guided by the psychological inability to reason state-by-state, we develop Obvious Preference as a weakening of Subjective Expected Utility Theory. We show that a strategy is an obviously dominant if and only if any Obvious Preference prefer it to any deviating strategy at any reachable information set. Applying the concept of Nash Equilibrium to Obvious Preference, we propose Obvious Nash Equilibrium to identify a set of mechanisms that are more robust than mechanisms with only Nash Equilibria.
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ISSN:0002-8282
1944-7981
DOI:10.1257/aer.p20171030