Rational Expectations and Depth of Reasoning in Strategic Interactions (joint with Ganna Pogrebna)

Wednesday 19 October 2016, 1.00PM to 2.00pm

Speaker(s): Peter Moffat (UEA)

Host: John Hey

Abstract: In the context of the standard guessing game, we extend level-k and cognitive hierarchy models to create a hybrid model which includes a class of “sophisticated” agents.  Sophisticated  agents are rational agents who believe that apart from lower-level types there are other sophisticated agents (of the same level as they are) in the population and best-repond to this belief.  A free parameter in the model is psb, representing a sophisticated agent’s belief about the proportion of other sophisticated agents in the population.   Our hybrid model nests the standard level-k and cognitive hierachy models (when psb=0) as well as the Nash equilibrium prediction (when psb=1) as special cases and can capture observed behaviour more accurately than any of the nested models.  Econometric estimation of psb reveals that psb.  Furthermore, if a sophisticated agent’s psb belief happens to coincide with the actual proportion of sophisticated agents in the population, ps, we may classify this agent as “clairvoyant sophisticated”, since in this situation their best response is the winning response.

Location: ARRC Auditorium (A/RC014)

Admission: All welcome