Games and Economic Behavior. July
2005, Vol. 52, Issue 1, Pages 94-132
The subjective framework is used to characterize the reasoning leading to an equilibrium refinement based on sequential rationality and Nash equilibrium in dynamic games. Equilibria based on sequential rationality require different reasoning on and off the equilibrium path for such solutions to emerge, or need arbitrary rules for reasoning depending on which game is played. We suggest a solution concept termed the “reasonable solution” based on maximization of confidence in rationality, equal treatment of the reasoning procedure at every decision point, confidence of this symmetry in the method of reasoning about others, and the use of the same reasoning principle by the modeler and the players. While not an equilibrium refinement, this concept generalizes the backward induction solution.