Reasoning about Bounded Reasoning

Shuige Liu and Gabriel Ziegler

No 79, Berlin School of Economics Discussion Papers from Berlin School of Economics

Abstract: Interactive decision-making relies on strategic reasoning. Two prominent frameworks capture this idea. One follows a structural perspective, exemplified by level-k and Cognitive Hierarchy models, which represent reasoning as an algorithmic process. The other adopts an epistemic perspective, formalizing reasoning through beliefs and higher-order beliefs. We connect these approaches by "Lifting" static complete-information games into incomplete-information settings where payoff types reflect players' levels. Within this unified framework, reasoning is represented through mathematically explicit and transparent belief restrictions. We analyze three instances: downward rationalizability, a robust benchmark concept; and two refinements, L-rationalizability and CH-rationalizability, which provide epistemic foundations---albeit with a nuance---for the classic level-k and Cognitive Hierarchy models, respectively. Our results clarify how reasoning depth relates to behavioral predictions, distinguish cognitive limits from belief restrictions, and connect bounded reasoning to robustness principles from mechanism design. The framework thus offers a transparent and tractable bridge between structural and epistemic approaches to reasoning in games.

Keywords: bounded reasoning; behavioral game theory; level-k; cognitive hierarchy; epistemic game theory; belief restrictions; Δ-rationalizability; robustness (search for similar items in EconPapers)
JEL-codes: C72 D82 D83 D90 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2025-10-20
New Economics Papers: this item is included in nep-cbe, nep-exp, nep-gth, nep-mic and nep-neu
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Persistent link: https://EconPapers.repec.org/RePEc:bdp:dpaper:0079

DOI: 10.48462/opus4-5966

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