Structural Models of Nonequilibrium Strategic Thinking: Theory, Evidence, and Applications

Vincent P. Crawford*, Miguel Costa-Gomes, Nagore Iriberri

*Corresponding author for this work

    Research output: Contribution to journalArticlepeer-review

    250 Citations (Scopus)

    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 languageEnglish
    Pages (from-to)5-62
    Number of pages58
    JournalJournal of Economic Literature
    Volume51
    Issue number1
    DOIs
    Publication statusPublished - 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

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