Abstract
Most applications of game theory assume equilibrium, justified by presuming either that learning will have converged to one, or that equilibrium approximates people's strategic thinking even when a learning justification is implausible. Yet several recent experimental and empirical studies suggest that people's initial responses to games often deviate systematically from equilibrium, and that structural nonequilibrium "level-k" or "cognitive hierarchy" models often out-predict equilibrium. Even when learning is possible and converges to equilibrium, such models allow better predictions of history-dependent limiting outcomes. This paper surveys recent theory and evidence on strategic thinking and illustrates the applications of level-k models in economics. (JEL C70, D03, D82, D83)
Original language | English |
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Pages (from-to) | 5-62 |
Number of pages | 58 |
Journal | Journal of Economic Literature |
Volume | 51 |
Issue number | 1 |
DOIs | |
Publication status | Published - Mar 2013 |
Keywords
- PRIVATE-VALUE AUCTIONS
- QUANTAL RESPONSE EQUILIBRIUM
- COORDINATION GAMES
- NORMAL-FORM GAMES
- COMMON KNOWLEDGE
- CHEAP-TALK
- GUESSING GAMES
- WINNERS CURSE
- INFORMATION-TRANSMISSION
- BOUNDED RATIONALITY