Inclusive Cognitive Hierarchy

Koriyama, Yukio and Ozkes, Ali ORCID: https://orcid.org/0000-0002-8720-2494 (2020) Inclusive Cognitive Hierarchy. Department of Strategy and Innovation Working Paper Series, 09/2020. WU Vienna University of Economics and Business, Vienna.

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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.

Item Type: Paper
Keywords: cognitive hierarchy, collective decision-making, level-k model, strategic thinking
Classification Codes: JEL classification: C91, C92, D72, D91
Divisions: Departments > Strategy and Innovation > Markets and Strategy
Depositing User: Gerlinde Rattasits-Kaas
Date Deposited: 04 Mar 2020 16:17
Last Modified: 17 Sep 2020 11:18
URI: https://epub.wu.ac.at/id/eprint/7506

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