Subjective Rationalizability in Hypergames

A new solution concept for hypergames called subjective rationalizability is proposed. Hypergame theory is a game theoretical framework that deals with agents who may misperceive game structures and explicitly takes into account hierarchy of perceptions, that is, an agent’s view about another agent’s view and so on. An action of an agent is called subjectively rationalizable when the agent thinks it can be a best response to the other’s choices, each of which the agent thinks each agent thinks is a best response to the other’s choices, and so on. Then it is proved that subjective rationalizability is equivalent to the standard notion of rationalizability under a condition called inside common knowledge. The result makes the new solution concept a practical tool in hypergame analyses. Theoretically, it is characterized as such a concept that provides the precise implication, that is, predicted outcomes, of a given hypergame structure