Stability of equilibria in games with procedurally rational players

One approach to the modeling of bounded rationality in games is based on th e dynamics of evolution and learning. An alternative static and equilibrium -based approach has been developed recently by Osborne and Rubinstein. This paper formalizes Osborne and Rubinstein's dynamic interpretation of their equilibrium concept, uses the criterion of dynamic stability as an equilibr ium refinement, and shows that stable equilibria can involve the playing of strictly dominated actions while dominant strategy equilibria can be unsta ble. These effects cannot occur under standard evolutionary game dynamics. Sufficient conditions for the instability of equilibria are provided for sy mmetric and asymmetric games. Journal of Economic Literature Classification Number: C72. (C) 2000 Academic Press.