Endogenous depth of reasoning
Larbi Alaoui () and
Antonio Penta ()
Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra
We introduce a model of strategic thinking in games of initial response. Unlike standard models of strategic thinking, in this framework the player's "depth of reasoning" is endogenously determined, and it can be disentangled from his beliefs over his opponent's cognitive bound. In our approach, individuals act as if they follow a cost-benefit analysis. The depth of reasoning is a function of the player's cognitive abilities and his payoffs. The costs are exogenous and represent the game theoretical sophistication of the player; the benefit instead is related to the game payoffs. Behavior is in turn determined by the individual's depth of reasoning and his beliefs about the reasoning process of the opponent. Thus, in our framework, payoffs not only affect individual choices in the traditional sense, but they also shape the cognitive process itself. Our model delivers testable implications on players' chosen actions as incentives and opponents change. We then test the model's predictions with an experiment. We administer different treatments that vary beliefs over payoffs and opponents, as well as beliefs over opponents' beliefs. The results of this experiment, which are not accounted for by current models of reasoning in games, strongly support our theory. We also show that the predictions of our model are highly consistent quantitatively with well-known unresolved empirical puzzles. Our approach therefore serves as a novel, unifying framework of strategic thinking that allows for predictions across games.
Keywords: cognitive cost; depth of reasoning; higher order beliefs; level-k reasoning; strategic thinking (search for similar items in EconPapers)
JEL-codes: C72 C92 D80 (search for similar items in EconPapers)
Date: 2012-07, Revised 2014-03
New Economics Papers: this item is included in nep-cbe, nep-evo, nep-exp, nep-gth, nep-mic and nep-neu
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Journal Article: Endogenous Depth of Reasoning (2016)
Working Paper: Endogenous Depth of Reasoning (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:1332
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