Boundedly Rational Nash Equilibrium: A Probabilistic Choice Approach

We propose an equilibrium forn-person finite games based on bounded rationality using the logit model of discrete choice theory. At equilibrium, each player uses appropriate choice probabilities, given those used by the others. Rationality is parameterized on a continuum from complete rationality to uniform random choice. Results on the existence of equilibrium and on convergence to Nash as rationality becomes perfect are similar to results due to McKelvey and Palfrey. We identify conditions such that for a given rationality parameter range the path of choices over time when the players use fictitious play converges to equilibrium.Journal of Economic LiteratureClassification Numbers: C72, L20.