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A Cognitive Hierarchy Theory of One-shot Games and Experimental Analysis
Colin Camerer California Institute of Technology - Division of the Humanities and Social Sciences Teck Ho University of California, Berkeley - Haas School of Business Juin-Kuan Chong National University of Singapore (NUS) - Business School September 8, 2003 Abstract: In game-theoretic equilibrium, players' beliefs about choices by others are statistically correct. This "mutual consistency" assumption often predicts poorly in one-shot games. We develop an alternative "cognitive hierarchy" (CH) theory. In the CH model players who are not thinking strategically (0 steps) randomize. Players doing k steps of thinking predict accurately what lower-level players (steps 0 to k − 1) do, and best-respond given their beliefs. The model can explain why equilibration is so limited in some games (such as p-beauty contest), and surprisingly accurate in other games (such as business entry). The average number of thinking steps is about 1.5 across many games. Working Paper Series Date posted: October 03, 2003 ; Last revised: October 08, 2003Suggested CitationContact Information
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