Level-k Reasoning and Incentives
AbstractLevel-k theories are agnostic over whether individuals stop the iterated reasoning because of their own cognitive constraints, or because of their beliefs about the cognitive constraints of their opponents. In practice, individual level of play may be a function of both. Moreover, the rounds of introspection that players perform may depend on their incentives to think more deeply. We develop a theory which explicitly models playersâ€™ reasoning procedure. The rounds of introspection that individuals perform and their actual level of play both follow endogenously. This model delivers testable implications as payoffs and opponents change, and it allows for comparisons across games. It also disentangles the cognitive bound of players for a given game from their beliefs about the play of their opponents. In conjunction with the framework, we present an experiment designed to test its predictions. We administer different treatments which vary beliefs over payoffs and opponents, as well as beliefs over opponentsâ€™ beliefs. The results of this experiment are consistent with the model, and appear to lend support to our theory. This experiment also conï¬rms the central premise that individuals change their level of play as incentives to think more and beliefs over opponents vary.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Barcelona Graduate School of Economics in its series Working Papers with number 653.
Date of creation: Jul 2012
Date of revision:
beliefs; bounded rationality; cognitive cost; higher order beliefs; incentives; level-k reasoning; value of reasoning;
Other versions of this item:
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
- C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
- D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-08-23 (All new papers)
- NEP-CBE-2012-08-23 (Cognitive & Behavioural Economics)
- NEP-EVO-2012-08-23 (Evolutionary Economics)
- NEP-EXP-2012-08-23 (Experimental Economics)
- NEP-GTH-2012-08-23 (Game Theory)
- NEP-MIC-2012-08-23 (Microeconomics)
- NEP-NEU-2012-08-23 (Neuroeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Vincent P. Crawford & Miguel A. Costa-Gomes & Nagore Iriberri, 2010. "Strategic Thinking," Levine's Working Paper Archive 661465000000001148, David K. Levine.
- Tomasz Strzalecki, 2010. "Depth of Reasoning and Higher Order Beliefs," Working Paper 8334, Harvard University OpenScholar.
- C. Monica Capra, 1999. "Anomalous Behavior in a Traveler's Dilemma?," American Economic Review, American Economic Association, vol. 89(3), pages 678-690, June.
- Grosskopf, Brit & Nagel, Rosemarie, 2008. "The two-person beauty contest," Games and Economic Behavior, Elsevier, vol. 62(1), pages 93-99, January.
- Willemien Kets, 2012. "Bounded Reasoning and Higher-Order Uncertainty," Discussion Papers 1547, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Allred , Sarah & Duffy, Sean & Smith, John, 2013. "Cognitive Load and Strategic Sophistication," MPRA Paper 47997, University Library of Munich, Germany.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bruno Guallar).
If references are entirely missing, you can add them using this form.