Bounded Rationality in Economics: A Game Theorist's View

In this paper, we will argue that it is essential to incorporate bounded rationality into game theory. Game theory has been applied to economics such as industrial organization on the basis of the naive interpretation of game theory, which requires players to be ideally rational in an extremely unrealistic way. We will stress the importance of establishing the perceptive interpretation of game theory by taking boundedly rational players' inductive reasoning processes into account. We will explain my recent work, Matsushima(1997), which shows that the subjective games perceived by players in the long run are entirely different from the true objective game, and are trivial games in the sense that there exists a strictly dominant and subjectively Pareto-efficient strategy profile.