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 players' 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 opponents' beliefs. The results of this experiment are consistent with the model, and appear to lend support to our theory. This experiment also confirms the central premise that individuals change their level of play as incentives to think more and beliefs over opponents vary.
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Bibliographic InfoPaper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 1332.
Date of creation: Jul 2012
Date of revision: Jan 2013
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Web page: http://www.econ.upf.edu/
beliefs; bounded rationality; cognitive cost ; higher order beliefs; incentives; initial responses; level-k reasoning; value of reasoning;
Other versions of this item:
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
- C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
- D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-09-30 (All new papers)
- NEP-CBE-2012-09-30 (Cognitive & Behavioural Economics)
- NEP-EVO-2012-09-30 (Evolutionary Economics)
- NEP-EXP-2012-09-30 (Experimental Economics)
- NEP-GTH-2012-09-30 (Game Theory)
- NEP-MIC-2012-09-30 (Microeconomics)
- NEP-NEU-2012-09-30 (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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