Title: Consequential Rationality,Procedural Rationality,andOptimal Nash Equilibrium
Authors: Marc LeMenestrel, INSEAD
Date: March, 1998
Status: working paper

Two perspectives on individual rationality in a social context have been traditionally considered: individuals act according to what they prefer, and individuals act according to rules.  This paper is an introductory and theoretical step towards the integration of these two approaches within a formal framework.We propose a definition of rationality that combines preferences for consequences with preferences for procedures. We can then consider individuals maximizing their utility for acts, as separated into utility for consequences (consequential rationality) and utility for actions themselves, as means or processes towards consequences (procedural rationality). The underlying qualitative structure of this definition enables simple and formal enhancement of Game Theory to allow interpretation of procedural concerns. After having formulated a solution concept of Nash Equilibrium with procedural concerns, we provide a refinement called an Optimal Nash Equilibrium. Such an equilibrium corresponds to the selection of the equilibrium whose acts are consequentially and procedurally preferred. When it exists, such an Optimal Equilibrium is unique. Hence, integrating the procedural dimension in rational behavior leads to a simple and rigorous solution for the selection of the ‘focal’ or ‘salient’ equilibriumin case of coordination,a difficult and outstanding issue with pure consequential approaches of rationality.  An application to the Prisoners’ Dilemma is proposed, where empirical observation of mutual cooperation does not reveal irrationality, but rather the influence of procedural preferences for cooperation, even if utility for consequences has been properly measured beforehand.

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