Game Theory without Partitions, and Applications to Speculation and Consensus

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 (KTYK), nested, balanced, and positively balanced. We show that it is necessary and sufficient that each agent's information processing errors be (1) nondeluded and balanced so that the agents cannot agree to disagree, (2) nondeluded and positively balanced so that it cannot be common knowledge that they are speculating, and (3) nondeluded and 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.