BAYESIAN BOUNDEDLY RATIONAL AGENTS PLAY THE FINITELY REPEATED PRISONERS-DILEMMA

In this paper a model of boundedly rational decision making in the Finitely Repeated Prisoner's Dilemma is proposed in which: (1) each player is Bayesian-rational; (2) this is common knowledge; (3) players are constrained by limited state spaces (their Bayesian minds) in 'processing' (1) and (2). Under these circumstances, we show that cooperative behavior may arise as an individually optimal response, except for the latter part of the game. Indeed, such behavior will necessarily obtain in long enough games if belief systems satisfy a natural condition: essentially, that all events consistent with the players' analysis of the game be attributed by them positive (although arbitrarily small) subjective probability.