Stepwise Thinking in Strategic Games with Incomplete Information

Carsten S. Nielsen
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Carsten S. Nielsen: Department of Economics, University of Copenhagen

No 10-22, Discussion Papers from University of Copenhagen. Department of Economics

Abstract: This paper proposes a general incomplete information framework for studying behavior in strategic games with stepwise (viz. `level-k' or `cognitive hierarchy') thinking, which has been found to describe strategic behavior well in experiments involving players' initial responses to games. It is shown that there exist coherent stepwise beliefs, implied by step types, that have the potential to encode all relevant information. In the structure of stepwise beliefs, players are unaware of opponents doing at least as much thinking as themselves. As a result, there exists a Bayesian Nash equilibrium strategy profile in which any player at some step fixes the best responses of opponents at lower steps and then best responds herself.

Keywords: game theory; interactive epistemology; unawareness; Bayesian Nash equilibrium; bounded rationality; level-k; cognitive hierarchy (search for similar items in EconPapers)
JEL-codes: C70 C72 D80 D82 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2010-07, Revised 2010-09
New Economics Papers: this item is included in nep-cta, nep-gth, nep-hpe and nep-neu
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Persistent link: https://EconPapers.repec.org/RePEc:kud:kuiedp:1022

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