Cognitive Imprecision and Strategic Behavior

51 Pages Posted: 9 Nov 2021

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: October 2021

Abstract

We propose and experimentally test a theory of strategic behavior in which players are cognitively imprecise and perceive a fundamental parameter with noise. We focus on 2 x 2 coordination games, which generate multiple equilibria when perception is precise. When adding a small amount of cognitive imprecision to the model, we obtain a unique equilibrium where players use a simple cutoff strategy. The model further predicts that behavior is context-dependent: players implement the unique equilibrium strategy with noise, and the noise decreases in fundamental volatility. Our experimental data strongly support this novel prediction and reject several alternative game-theoretic models that do not predict context-dependence. We also find that subjects are aware of other players' imprecision, which is key to generating strategic uncertainty. Our framework has important implications for the literature on global games and, more broadly, illuminates the role of perception in generating both random and context-dependent behavior in games.

JEL Classification: C72, C92, D91, E71

Suggested Citation

Frydman, Cary and Nunnari, Salvatore, Cognitive Imprecision and Strategic Behavior (October 2021). CEPR Discussion Paper No. DP16644, Available at SSRN: https://ssrn.com/abstract=3960227

Cary Frydman (Contact Author)

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

701 Exposition Blvd
Los Angeles, CA California 90089
United States

Salvatore Nunnari

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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