Inclusive Cognitive Hierarchy

39 Pages Posted: 18 Feb 2020 Last revised: 17 May 2021

See all articles by Yukio Koriyama

Yukio Koriyama

Ecole Polytechnique, Palaiseau - Department of Economics

Ali Ozkes

WU Vienna Institute for Markets and Strategy

Date Written: January 28, 2020

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 propose 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.

Keywords: cognitive hierarchy, collective decision-making, level-k model, strategic thinking

JEL Classification: C91, C92, D72, D91

Suggested Citation

Koriyama, Yukio and Ozkes, Ali, Inclusive Cognitive Hierarchy (January 28, 2020). Journal of Economic Behavior and Organization, Vol. 186, 2021, Available at SSRN: https://ssrn.com/abstract=3526920 or http://dx.doi.org/10.2139/ssrn.3526920

Yukio Koriyama

Ecole Polytechnique, Palaiseau - Department of Economics ( email )

Route de Saclay
Palaiseau, 91120
France

Ali Ozkes (Contact Author)

WU Vienna Institute for Markets and Strategy ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

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