All Types Naive and Canny

Aviad Heifetz and Willemien Kets

No 1550, Discussion Papers from Northwestern University, Center for Mathematical Studies in Economics and Management Science

Abstract: This paper constructs a type space that contains all types with a finite depth of reasoning, as well as all types with an infinite depth of reasoning - in particular those types for whom finite-depth types are conceivable, or think that infnite-depth types are conceivable in the mind of other players, etcetera. We prove that this type space is uni- versal with respect to the class of type spaces that include types with a finite or infinite depth of reasoning. In particular, we show that it contains the standard universal type space of Mertens and Zamir (1985) as a belief-closed subspace, and that this subspace is characterized by common belief of infinite-depth reasoning. This framework allows us to study the robustness of classical results to small deviations from perfect rationality. As an example, we demonstrate that in the global games of Carlsson and van Damme (1993), a small ‘grain of naivete’ suffices to overturn the classical uniqueness results in that literature. JEL Code: C700, C720, D800, D830

Keywords: Level-k models; cognitive hierarchy models; universal type space; global games (search for similar items in EconPapers)
Date: 2012-08-04
New Economics Papers: this item is included in nep-gth, nep-mic and nep-neu
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Citations: View citations in EconPapers (8)

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