Robust Predictions under Finite Depth of Reasoning

Kota Murayama
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Kota Murayama: Department of Economics, Northwestern University, USA

No DP2015-28, Discussion Paper Series from Research Institute for Economics & Business Administration, Kobe University

Abstract: When players have a finite depth of reasoning, it is usually assumed that each player has a commonly known anchor behavior. This paper provides a general framework to examine whether predictions are robust to uncertainty about other players' anchors. We give two different sufficient conditions for the robustness. The first condition shows that any p-dominant equilibrium is robust if players put sufficiently small probability (decreasing in p) on high-depth types. This result highlights a distinction between two prominent finite depth of reasoning models: a risk dominated equilibrium is robust in the cognitive hierarchy model, but not in the level-k model. We also show that equilibria of dominance solvable models are robust.

Keywords: Robustness; Iterative reasoning; Level-k model; Cognitive-hierarchy model; Higher-order belief; Bounded rationality (search for similar items in EconPapers)
Pages: 29 pages
Date: 2015-07
New Economics Papers: this item is included in nep-gth, nep-mic and nep-neu
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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