Endogenous Depth of Reasoning
AbstractWe introduce a model of strategic thinking in games of initial response. Unlike standard level-k models, in this framework the player's `depth of reasoning' is endogenously determined, and it can be disentangled from his beliefs over his opponent's cognitive bound. In our approach, individuals act as if they follow a cost-benefit analysis. The depth of reasoning is a function of the player's cognitive abilities and his payoffs. The costs are exogenous and represent the game theoretical sophistication of the player; the benefit instead is related to the game payoffs. Behavior is in turn determined by the individual's depth of reasoning and his beliefs about the reasoning process of the opponent. Thus, in our framework, payoffs not only affect individual choices in the traditional sense, but they also shape the cognitive process itself. Our model delivers testable implications on players' chosen actions as incentives and opponents change. We then test the model's predictions with an experiment. We administer different treatments that vary beliefs over payoffs and opponents, as well as beliefs over opponents' beliefs. The results of this experiment, which are not accounted for by current models of reasoning in games, strongly support our theory. Our approach therefore serves as a novel, unifying framework of strategic thinking in games.
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Bibliographic InfoPaper provided by Barcelona Graduate School of Economics in its series Working Papers with number 653.
Date of creation: Mar 2014
Date of revision:
cognitive cost; depth of reasoning; higher order beliefs; level-k reasoning; strategic thinking;
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
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.:
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