Abstract
Bounded rational behaviour is commonly observed in experimental games and in real life situations. Neuroeconomics can help to understand the mental processing underlying bounded rationality and out-of-equilibrium behaviour. Here we report results from recent studies on the neural basis of limited steps of reasoning in a competitive setting —the beauty contest game. We use functional magnetic resonance imaging (fMRI) to study the neural correlates of human mental processes in strategic games. We apply a cognitive hierarchy model to classify subject’s choices in the experimental game according to the degree of strategic reasoning so that we can identify the neural substrates of different levels of strategizing. We found a correlation between levels of strategic reasoning and activity in a neural network related to mentalizing, i.e. the ability to think about other’s thoughts and mental states. Moreover, brain data showed how complex cognitive processes subserve the higher level of reasoning about others. We describe how a cognitive hierarchy model fits both behavioural and brain data.
Highlights
Economists only recently departed from the rational man and the notion of common knowledge of rationality when theorizing on economic problems
Common knowledge of rationality means that a decision maker knows that he is rational, that he knows that the other decision makers are rational and that he knows that others know that everybody is rational, and so on
The game was inspired by a quote from Keynes (1936): Professional investment may be likened to those newspaper competitions [the beauty contest] in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view
Summary
Economists only recently departed from the rational man and the notion of common knowledge of rationality when theorizing on economic problems. The game was inspired by a quote from Keynes (1936): Professional investment may be likened to those newspaper competitions [the beauty contest] in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view It is not a case of choosing those which, to the best of one’s judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. Identifying the neural correlates of different levels of reasoning, and being able to distinguish between low- versus high-level reasoning people according to their brain activity will help to explain the heterogeneity observed in human strategic behaviour
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