A generalized cognitive hierarchy model of games

Juin-Kuan Chong, Teck Ho () and Colin Camerer ()

Games and Economic Behavior, 2016, vol. 99, issue C, 257-274

Abstract: Subjects in simple games frequently exhibit non-equilibrium behaviors. Cognitive hierarchy (CH) and level k (LK) are two prevailing structural models that capture such behaviors well. This paper proposes a generalized CH (GCH) model that nests a variant of the LK model, called LM. GCH differs from CH in two ways. First, each lower level's actual frequency is exponentially weighted with α to form level-k's belief on relative proportions; α captures stereotype bias. CH assumes no stereotype bias (α=1) and LM assumes extreme bias (α=∞). Second, GCH replaces random choice with minimum aversion for level 0. Level 0s are more likely to choose strategies that never yield the minimum payoff for any of the opponent's strategies. GCH captures behaviors better than CH and LK in fifty-five n×m games from four datasets. Robustness tests using three new games further validate GCHs descriptive strength over CH and LK.

Keywords: Cognitive hierarchy; Level-k model; Level-m model; Generalized cognitive hierarchy; Non-equilibrium structural models; Behavioral game theory (search for similar items in EconPapers)
JEL-codes: C72 C91 D03 D83 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (28)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:gamebe:v:99:y:2016:i:c:p:257-274

DOI: 10.1016/j.geb.2016.08.007

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