Cognitive Imprecision and Strategic Behavior

61 Pages Posted: 18 Nov 2021 Last revised: 2 Aug 2022

See all articles by Cary Frydman

Cary Frydman

University of Southern California - Marshall School of Business

Salvatore Nunnari

Bocconi University; Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research

Multiple version iconThere are 3 versions of this paper

Date Written: August 1, 2022

Abstract

We propose and experimentally test a theory of strategic behavior in which players encode and process game payoffs with cognitive noise. We focus on 2 × 2 coordination games that have multiple equilibria under complete information. Introducing a small amount of cognitive noise generates a unique equilibrium where players use a simple cutoff strategy. The model further predicts stochastic and context-dependent behavior: as volatility in the environment declines, perception of payoffs becomes less noisy and, thus, actions become more sensitive to payoffs. Context-dependence arises from an efficient use of limited cognitive resources. In a pre-registered experiment, we find strong support for these predictions: the observed distribution of actions depends systematically on the payoff distribution to which a subject’s perceptual system is adapted. Moreover, response times are consistent with the cognitive mechanism we propose. Subjects exhibit longer response times when payoffs are closer to the equilibrium cutoff and when the distribution of payoffs is more volatile. Our experimental results reject a broad class of game theoretic models that do not predict context-dependent behavior and, more generally, illuminate the role that cognitive noise plays in changing the information structure in games.

Keywords: Context-Dependence, Complexity, Stochastic Choice, Coordination Games

JEL Classification: C72, C92, D91, E71

Suggested Citation

Frydman, Cary and Nunnari, Salvatore, Cognitive Imprecision and Strategic Behavior (August 1, 2022). Available at SSRN: https://ssrn.com/abstract=3939522 or http://dx.doi.org/10.2139/ssrn.3939522

Cary Frydman

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA California 90089
United States

Salvatore Nunnari (Contact Author)

Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136
Italy

Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research

Via Roentgen 1
Milan, 20136
Italy

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