Structural Models of Nonequilibrium Strategic Thinking: Theory, Evidence, and Applications
Journal of Economic Literature
vol. 51,
no. 1, March 2013
(pp. 5-62)
Abstract
Most applications of game theory assume equilibrium, justified by presuming either that learning will have converged to one, or that equilibrium approximates people's strategic thinking even when a learning justification is implausible. Yet several recent experimental and empirical studies suggest that people's initial responses to games often deviate systematically from equilibrium, and that structural nonequilibrium "level-k" or "cognitive hierarchy" models often out-predict equilibrium. Even when learning is possible and converges to equilibrium, such models allow better predictions of history-dependent limiting outcomes. This paper surveys recent theory and evidence on strategic thinking and illustrates the applications of level-k models in economics. (JEL C70, D03, D82, D83)Citation
Crawford, Vincent P., Miguel A. Costa-Gomes, and Nagore Iriberri. 2013. "Structural Models of Nonequilibrium Strategic Thinking: Theory, Evidence, and Applications." Journal of Economic Literature, 51 (1): 5-62. DOI: 10.1257/jel.51.1.5JEL Classification
- C70 Game Theory and Bargaining Theory: General
- D91 Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
- D82 Asymmetric and Private Information; Mechanism Design
- D83 Search; Learning; Information and Knowledge; Communication; Belief