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 that allows for predictions across games.
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 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: May 2013
Contact details of provider:
Web page: http://www.econ.upf.edu/
cognitive cost ; depth of reasoning; level-k reasoning; strategic thinking;
Find related papers by JEL classification:
- 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-2012-09-30 (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.:
- C. Monica Capra, 1999. "Anomalous Behavior in a Traveler's Dilemma?," American Economic Review, American Economic Association, vol. 89(3), pages 678-690, June.
- Willemien Kets, 2012. "Bounded Reasoning and Higher-Order Uncertainty," Discussion Papers 1547, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Grosskopf, Brit & Nagel, Rosemarie, 2008. "The two-person beauty contest," Games and Economic Behavior, Elsevier, vol. 62(1), pages 93-99, January.
- Tomasz Strzalecki, 1969. "Depth of Reasoning and Higher Order Beliefs," Working Paper 8334, Harvard University OpenScholar.
- 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.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.