Complexity Equilibrium

Optimal play in sequential games often requires a high degree of sophistication. However, in practice, people tend to prefer simpler strategies, even if those strategies do not lead to the best results. In this paper, we introduce κ-Complexity Equilibrium and Complexity Equilibrium, novel equilibrium concepts for finite sequential games that explicitly incorporate the intrinsic human preference for simplicity. We establish existence results for both equilibria and illustrate their practical value by: (i) showing that Complexity Equilibrium is a refinement of Nash Equilibrium, where the selected equilibria are determined by a tradeoff between strategic complexity and payoffs; and (ii) using κ-Complexity Equilibrium to explain individuals’ apparent mistakes in empirical applications of games.