DEFINITION of 'Trembling Hand Perfect Equilibrium'

In game theory, trembling hand perfect equilibrium is a state that takes into consideration the possibility of off-the-equilibrium play by assuming that the players' trembling hands may choose unintended strategies, although this probability is small. Trembling hand perfect equilibrium is a refinement by German economist Reinhard Selten of the Nash equilibrium proposed by John Forbes Nash, Jr., who shared the 1994 Nobel Memorial Prize in Economic Sciences with Reinhard Selten and John Harsanyi, another game theorist.

BREAKING DOWN 'Trembling Hand Perfect Equilibrium'

In a card game, this would amount to a player mistakenly playing the wrong card through a blunder or error (a "tremble"). By acknowledging the possibility that the opponent may have a lapse in reason or judgment, the player chooses a trembling hand perfect equilibrium that takes into account this probability and protects the player should the opponent make a mistake. The trembling hand, perfect equilibrium concept, finds application in several areas, including the theory of industrial organization and macroeconomic theory for economic policy.

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