Inclusive Cognitive Hierarchy

Yukio Koriyama and Ali Ozkes

No 09/2020, Department for Strategy and Innovation Working Paper Series from WU Vienna University of Economics and Business

Abstract: Cognitive hierarchy theory, a collection of structural models of non-equilibrium thinking, in which players' best responses rely on heterogeneous beliefs on others' strategies including naive behavior, proved powerful in explaining observations from a wide range of games. We introduce an inclusive cognitive hierarchy model, in which players do not rule out the possibility of facing opponents at their own thinking level. Our theoretical results show that inclusiveness is crucial for asymptotic properties of deviations from equilibrium behavior in expansive games. We show that the limiting behaviors are categorized in three distinct types: naive, Savage rational with inconsistent beliefs, and sophisticated. We test the model in a laboratory experiment of collective decision-making. The data suggests that inclusiveness is indispensable with regard to explanatory power of the models of hierarchical thinking.

Keywords: cognitive hierarchy; collective decision-making; level-k model; strategic thinking (search for similar items in EconPapers)
Date: 2020-03-04
New Economics Papers: this item is included in nep-cbe, nep-cdm, nep-evo, nep-exp and nep-gth
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Related works:
Journal Article: Inclusive cognitive hierarchy (2021)
Working Paper: Inclusive Cognitive Hierarchy in Collective Decisions (2018)
Working Paper: Inclusive Cognitive Hierarchy in Collective Decisions (2018)
Working Paper: Condorcet Jury Theorem and Cognitive Hierarchies: Theory and Experiments (2017)
Working Paper: Condorcet Jury Theorem and Cognitive Hierarchies: Theory and Experiments (2017)
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