Abstract

I designed an experiment to study the persistence of the prevailing levels of reasoning across games. Instead of directly comparing the k-level(s) of reasoning for each game, I used cognitive load to manipulate the strategic environment by imposing variations on the subject’s cost of reasoning and their first- and second-order beliefs. Subjects have systematic changes in k-level(s) of reasoning across games. That finding suggests that subjects are responsive to changes in the strategic environment. Changes in k-level(s) of reasoning are mostly consistent with the endogenous depth of reasoning model when subjects are more cognitively capable or facing less cognitively capable opponents. Subjects have cognitive bounds, but often choose a lower-type action due to their beliefs about their opponents. Finally, cognitive ability plays a significant role in subjects making strategic adjustments when facing different strategic environments.

Highlights

  • The use of the level-k model has prevailed in the literature for characterizing people’s initial responses in laboratory strategic games [1,2]

  • Following the endogenous depth of reasoning framework, I controlled the strategic environment by varying the cost of reasoning for the subjects, and their first- and second-order beliefs about their opponents

  • My findings were consistent with the endogenous depth of reasoning (EDR) model under some conditions

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Summary

Introduction

The use of the level-k model has prevailed in the literature for characterizing people’s initial responses in laboratory strategic games [1,2]. The model characterizes the player’s systematic deviations from the Nash equilibrium using a bounded rational-type explanation. The level-0 type’s action is assumed to be uniformly distributed over all actions (or in some cases, level-0 type’s action is the most prominent action available), whereas the level-1 type has the best response to the expected action of the level-0 type. The level-2 type has the best response to the expected action of the level-1 type. The iterations follow this pattern, as the level-k type always has the best response to the actions of level-k − 1 type Such patterns of off-equilibrium play have been evidenced in many laboratory experiments. Camerer et al developed a cognitive hierarchy model [3]

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