TY - JOUR
T1 - Structural Models of Nonequilibrium Strategic Thinking
T2 - Theory, Evidence, and Applications
AU - Crawford, Vincent P.
AU - Costa-Gomes, Miguel A.
AU - Iriberri, Nagore
PY - 2013/3
Y1 - 2013/3
N2 - 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)
AB - 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)
U2 - 10.1257/jel.51.1.5
DO - 10.1257/jel.51.1.5
M3 - Article
SN - 0022-0515
VL - 51
SP - 5
EP - 62
JO - Journal of Economic Literature
JF - Journal of Economic Literature
IS - 1
ER -