Level k-Thinking and Ambiguity Aversion

Student: Bakiev Marat

Supervisor: Emiliano Catonini

Educational Programme: Financial Economics (Master)

Year of Graduation: 2017

Solution concept that connects the model of bounded rationality with ambiguity aversion is proposed. It is proved that there is a cycle of optimal strategies for the case of agents characterized by classical level-k thinking. For the case of agents perceiving ambiguity towards the levels of opponents it is proved that in the limit of level of thinking there is single optimal profile of strategies (convergence property). One of the main advantages of proposed concept over Nash equilibrium is that this concept always picks unique optimal solution in the set of pure strategies.

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