PAYOFF DOMINANCE AND THE STACKELBERG HEURISTIC

Payoff dominance, a criterion for choosing between equilibrium points in games, is intuitively compelling, especially in matching games and other games of common interests, but it has not been justified from st andard game-theoretic rationality assumptions. A psychological explana tion of it is offered in terms of a form of reasoning that we call the Stackelberg heuristic in which players assume that their strategic th inking will be anticipated by their co-player(s). Two-person games are called Stackelberg-soluble if the players' strategies that maximize a gainst their co-players' best replies intersect in a Nash equilibrium. Proofs are given that every game of common interests is Stackelberg-s oluble, that a Stackelberg solution is always a payoff-dominant outcom e, and that in every game with multiple Nash equilibria a Stackelberg solution is a payoff-dominant equilibrium point. It is argued that the Stackelberg heuristic may be justified by evidentialist reasoning.