Inclusive Cognitive Hierarchy

Ali Özkes, Yukio Koriyama

Publication: Working/Discussion PaperWU Working Paper

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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.
Original languageEnglish
Publication statusPublished - 2020

Publication series

NameDepartment of Strategy and Innovation Working Paper Series
No.09/2020

Austrian Classification of Fields of Science and Technology (ÖFOS)

  • 101017 Game theory
  • 502047 Economic theory

WU Working Paper Series

  • Department of Strategy and Innovation Working Paper Series

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