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Three steps ahead

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  • Heller, Yuval

Abstract

Experimental evidence suggest that people only use 1-3 iterations of strategic reasoning, and that some people systematically use less iterations than others. In this paper, we present a novel evolutionary foundation for these stylized facts. In our model, agents interact in finitely repeated Prisoner's Dilemma, and each agent is characterized by the number of steps he thinks ahead. When two agents interact, each of them has an independent probability to observe the opponent's type. We show that if this probability is not too close to 0 or 1, then the evolutionary process admits a unique stable outcome, in which the population includes a mixture of “naive” agents who think 1 step ahead, and “sophisticated” agents who think 2-3 steps ahead.

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  • Heller, Yuval, 2012. "Three steps ahead," MPRA Paper 40714, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:40714
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Heller, Yuval, 2014. "Stability and trembles in extensive-form games," Games and Economic Behavior, Elsevier, vol. 84(C), pages 132-136.
    2. Sivan Frenkel & Yuval Heller & Roee Teper, 2017. "The Endowment Effect as a Blessing," Working Papers 2017-06, Bar-Ilan University, Department of Economics.
    3. Heller, Yuval & Mohlin, Erik, 2015. "Stable Observable Behavior," MPRA Paper 63013, University Library of Munich, Germany.
    4. Yuval Heller & Eyal Winter, 2016. "Rule Rationality," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 57, pages 997-1026, August.
    5. Heller, Yuval & Mohlin, Erik, 2014. "Coevolution of Deception and Preferences: Darwin and Nash Meet Machiavelli," MPRA Paper 58255, University Library of Munich, Germany.

    More about this item

    Keywords

    Indirect evolution; cognitive hierarchy; bounded forward-looking; Prisoner's Dilemma; Cooperation;

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games

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