Inclusive Cognitive Hierarchy

Cognitive hierarchy theory, a collection of structural models of non-equilibrium thinking, in which players' best responses rely on heterogeneous beliefs on others' strategies including naive behavior, proved powerful in explaining observations from a wide range of games. We introduce an inclusive cognitive hierarchy model, in which players do not rule out the possibility of facing opponents at their own thinking level. Our theoretical results show that inclusiveness is crucial for asymptotic properties of deviations from equilibrium behavior in expansive games. We show that the limiting behaviors are categorized in three distinct types: naive, Savage rational with inconsistent beliefs, and sophisticated. We test the model in a laboratory experiment of collective decision-making. The data suggests that inclusiveness is indispensable with regard to explanatory power of the models of hierarchical thinking.Series: Department of Strategy and Innovation Working Paper Serie

The Collective Wisdom of Beauty Contests

This note uses techniques developed for aggregate games to characterize the set of equilib- ria for a beauty contest or prediction game in which the experts’ preferences are quadratic, but with an otherwise unrestricted information structure for private signals and the state variable. We show that, on aggregate, the experts’ collective estimate of the unknown parameter to be estimated is unbiased for every equilibrium.Aggregate games, beauty contests, prediction games

Can We Build Behavioral Game Theory?

The way economists and other social scientists model how people make interdependent decisions is through the theory of games. Psychologists and behavioral economists, however, have established many deviations from the predictions of game theory. In response to these findings, a broad movement has arisen to salvage the core of game theory. Extant models of interdependent decision-making try to improve their explanatory domain by adding some corrective terms or limits. We will make the argument that this approach is misguided. For this approach to work, the deviations would have to be consistent. Drawing in part on our experimental results, we will argue that deviations from classical models are not consistent for any individual from one task to the next or between individuals for the same task. In turn, the problem of finding an equilibrium strategy is not easier but rather is exponentially more difficult. It does not seem that game theory can be repaired by adding corrective terms (such as consideration of personal characteristics, social norms, heuristic or bias terms, or cognitive limits on choice and learning). In what follows, we describe new methods for investigating interdependent decision-making. Our experimental results show that people do not choose consistently, do not hold consistent beliefs, and do not in general align actions and beliefs. We will show that experimental choices are inconsistent in ways that prevent us from drawing general characterizations of an individual’s choices or beliefs or of the general population\u27s choices and beliefs. A general behavioral game theory seems a distant and, at present, unfulfilled hope

Are Groups more Rational than Individuals? A Review of Interactive Decision Making in Groups

Many decisions are interactive; the outcome of one party depends not only on its decisions or on acts of nature but also on the decisions of others. In the present article, we review the literature on decision making made by groups of the past 25 years. Researchers have compared the strategic behavior of groups and individuals in many games: prisoner’s dilemma, dictator, ultimatum, trust, centipede and principal-agent games, among others. Our review suggests that results are quite consistent in revealing that groups behave closer to the game-theoretical assumption of rationality and selfishness than individuals. We conclude by discussing future research avenues in this area.group decision making, interactive decision making, rationality, discontinuity effect

Spartan Daily, March 19, 1937

Volume 25, Issue 102https://scholarworks.sjsu.edu/spartandaily/2587/thumbnail.jp

Aggregate Representations of Aggregate Games

An aggregate game is a normal-form game with the property that each player’s payoff is a function only of his own strategy and an aggregate function of the strategy profile of all players. Aggregate games possess a set of purely algebraic properties that can often provide simple characterizations of equilibrium aggregates without first requiring that one solves for the equilibrium strategy profile. The defining nature of payoffs in an aggregate game allows one to project the n-player strategic analysis of a normal form game onto a lower-dimension aggregate-strategy space, thereby converting an n-player game to a simpler object – a self-generating single-person maximization program. We apply these techniques to a number of economic settings including competition in supply functions and multi-principal common agency games with nonlinear transfer functions.Aggregate games, common agency, asymmetric informa- tion, menu auctions

The European UTMS/IMT2000 license auctions

We survey the recent European UMTS license auctions and compare their outcomes with the predictions of a simple model that emphasizes future market structure as a main determinant of valuations for licenses. Since the main goal of most spectrum allocation procedures is economic efficiency, and since consumers (who are affected by the ensuing market structure) do not participate at the auction stage, good designs must alleviate the asymmetry among incumbents and potential entrants by actively encouraging entry

Can Groups Solve the Problem of Overbidding in Contests?

This paper reports an experiment that examines whether groups can make better decisions than individuals in contests. Our experiment replicates previous findings that individual players significantly overbid relative to theoretical predictions, incurring substantial losses. There is high variance in individual bids and strong heterogeneity across individual players. The new findings of our experiment are that groups make bids that are 25% lower, bids have less variance, and there is less heterogeneity across groups than across individuals. Therefore, groups receive significantly higher and more homogeneous payoffs than individuals. We elicit individual and group preferences towards risk using simple lotteries. The results indicate that groups make less risky decisions, which is a possible explanation for lower bids in contests. Most importantly, we find that groups learn to make lower bids from communication and negotiation between group members.Rent-seeking; Contest; Experiments; Risk; Over-dissipation; Group Decision-making