Cognitive Ability and Learning to Play Equilibrium: A Level-k Analysis

33 Pages Posted: 22 Apr 2012

See all articles by David Gill

David Gill

Purdue University, Department of Economics

Victoria L. Prowse

Purdue University - Department of Economics; IZA Institute of Labor Economics; German Institute for Economic Research (DIW Berlin)

Date Written: April 2, 2012

Abstract

In this paper we investigate how cognitive ability influences behavior, success and the evolution of play towards Nash equilibrium in repeated strategic interactions. We study behavior in a p-beauty contest experiment and find striking differences according to cognitive ability: more cognitively able subjects choose numbers closer to equilibrium, converge more frequently to equilibrium play and earn more even as behavior approaches the equilibrium prediction. To understand better how subjects with different cognitive abilities learn differently, we estimate a structural model of learning based on level-k reasoning. We find a systematic positive relationship between cognitive ability and levels; furthermore, the average level of more cognitively able subjects responds positively to the cognitive ability of their opponents, while the average level of less cognitively able subjects does not respond at all. Our results suggest that, in strategic environments, higher cognitive ability translates into better analytic reasoning and a better 'theory of mind.'

Keywords: Cognitive ability, Bounded rationality, Learning, Convergence, Level-k, Non-equilibrium behavior, Beauty contest, Repeated games, Structural modeling, Theory of mind, Intelligence, Raven test

JEL Classification: C92, C73, D83

Suggested Citation

Gill, David and Prowse, Victoria L., Cognitive Ability and Learning to Play Equilibrium: A Level-k Analysis (April 2, 2012). Available at SSRN: https://ssrn.com/abstract=2043336 or http://dx.doi.org/10.2139/ssrn.2043336

David Gill (Contact Author)

Purdue University, Department of Economics ( email )

610 Purdue Mall
West Lafayette, IN 47907
United States

Victoria L. Prowse

Purdue University - Department of Economics ( email )

West Lafayette, IN 47907-1310
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstra├če 58
Berlin, 10117
Germany

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