Journal of Economic Literature
ISSN 0022-0515 (Print) | ISSN 2328-8175 (Online)
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