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Structural Models of Nonequilibrium Strategic Thinking: Theory, Evidence, and Applications

  • Vincent P. Crawford
  • Miguel A. Costa-Gomes
  • Nagore Iriberri

Most applications of game theory assume equilibrium, justified by presuming either that learning will have converged to one, or that equilibrium approximates people's strategic thinking even when a learning justification is implausible. Yet several recent experimental and empirical studies suggest that people's initial responses to games often deviate systematically from equilibrium, and that structural nonequilibrium "level-k" or "cognitive hierarchy" models often out-predict equilibrium. Even when learning is possible and converges to equilibrium, such models allow better predictions of history-dependent limiting outcomes. This paper surveys recent theory and evidence on strategic thinking and illustrates the applications of level-k models in economics. (JEL C70, D03, D82, D83)

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Article provided by American Economic Association in its journal Journal of Economic Literature.

Volume (Year): 51 (2013)
Issue (Month): 1 (March)
Pages: 5-62

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Handle: RePEc:aea:jeclit:v:51:y:2013:i:1:p:5-62
Note: DOI: 10.1257/jel.51.1.5
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