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Level-n bounded rationality and dominated strategies in normal-form games

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  • Stahl, Dale O.
  • Haruvy, Ernan

Abstract

Dominated strategies play a crucial role in game theory and its solution concepts. While empirical studies confirm that humans generally avoid dominated strategies, they also suggest that humans seldom believe others will avoid such strategies. Hence, the iterated dominance solution is not likely to be a good predictor of one-shot behavior. We investigate how the salience of a dominated strategy affects the extent to which players believe that others will recognize and avoid it. Level-n theory serves as a useful tool in this empirical investigation, as it is able to classify behavior into levels of bounded rationality and provide clear statistical tests for model comparisons. We find that even the most obviously dominated strategies do not induce consistently significant behavioral differences in a variety of one-shot games. Nevertheless, the fit of the Level-n model can be improved by hypothesizing that the Level-0 choices and Level-1 beliefs are tilted slightly away from the uniform distribution to the extent that the average payoff of a strategy falls below a threshold.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 66 (2008)
Issue (Month): 2 (May)
Pages: 226-232

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Handle: RePEc:eee:jeborg:v:66:y:2008:i:2:p:226-232

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Web page: http://www.elsevier.com/locate/jebo

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  1. Stahl, Dale II & Wilson, Paul W., 1994. "Experimental evidence on players' models of other players," Journal of Economic Behavior & Organization, Elsevier, vol. 25(3), pages 309-327, December.
  2. Stahl, Dale O., 1996. "Boundedly Rational Rule Learning in a Guessing Game," Games and Economic Behavior, Elsevier, vol. 16(2), pages 303-330, October.
  3. Ernan Haruvy & Dale O. Stahl & Paul W. Wilson, 2001. "Modeling And Testing For Heterogeneity In Observed Strategic Behavior," The Review of Economics and Statistics, MIT Press, vol. 83(1), pages 146-157, February.
  4. Selten, Reinhard & Abbink, Klaus & Buchta, Joachim & Sadrieh, Abdolkarim, 2003. "How to play (3 x 3)-games.: A strategy method experiment," Games and Economic Behavior, Elsevier, vol. 45(1), pages 19-37, October.
  5. Katok, Elena & Sefton, Martin & Yavas, Abdullah, 2002. "Implementation by Iterative Dominance and Backward Induction: An Experimental Comparison," Journal of Economic Theory, Elsevier, vol. 104(1), pages 89-103, May.
  6. Miguel Costa-Gomes & Vincent P. Crawford & Bruno Broseta, . "Cognition and Behavior in Normal-Form Games:An Experimental Study," Discussion Papers 00/45, Department of Economics, University of York.
  7. Nagel, Rosemarie, 1995. "Unraveling in Guessing Games: An Experimental Study," American Economic Review, American Economic Association, vol. 85(5), pages 1313-26, December.
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Cited by:
  1. Erik Wengström, 2008. "Price competition, level-k theory and communication," Economics Bulletin, AccessEcon, vol. 3(66), pages 1-15.
  2. Giovanna Devetag & Sibilla Di Guida, 2010. "Feature-based Choice and Similarity in Normal-form Games: An Experimental Study," LEM Papers Series 2010/18, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.

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