Cognitive Hierarchy Theory and Two-Person Games

Carlos Gracia-Lázaro, Luis Mario Floría and Yamir Moreno
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Carlos Gracia-Lázaro: Institute for Biocomputation and Physics of Complex Systems (BIFI), University of Zaragoza, 50018 Zaragoza, Spain
Luis Mario Floría: Institute for Biocomputation and Physics of Complex Systems (BIFI), University of Zaragoza, 50018 Zaragoza, Spain
Yamir Moreno: Institute for Biocomputation and Physics of Complex Systems (BIFI), University of Zaragoza, 50018 Zaragoza, Spain

Games, 2017, vol. 8, issue 1, 1-18

Abstract: The outcome of many social and economic interactions, such as stock-market transactions, is strongly determined by the predictions that agents make about the behavior of other individuals. Cognitive hierarchy theory provides a framework to model the consequences of forecasting accuracy that has proven to fit data from certain types of game theory experiments, such as Keynesian beauty contests and entry games. Here, we focus on symmetric two-player-two-action games and establish an algorithm to find the players’ strategies according to the cognitive hierarchy approach. We show that the snowdrift game exhibits a pattern of behavior whose complexity grows as the cognitive levels of players increases. In addition to finding the solutions up to the third cognitive level, we demonstrate, in this theoretical frame, two new properties of snowdrift games: (i) any snowdrift game can be characterized by only a parameter, its class; (ii) they are anti-symmetric with respect to the diagonal of the pay-off’s space. Finally, we propose a model based on an evolutionary dynamics that captures the main features of the cognitive hierarchy theory.

Keywords: social dilemmas; game theory; cognitive theory (search for similar items in EconPapers)
JEL-codes: C C7 C70 C71 C72 C73 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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