Reasoning about others' reasoning

An individual's decision to reason about a problem may involve a tradeoff between cognitive costs and a notion of value. This paper analyzes the primitive properties that must hold for the decision to stop thinking to be represented by a cost-benefit analysis. We then provide additional properties that give more structure to the value of reasoning function. We show how our model applies to a variety of settings, including contexts involving R&D applications, response time, and strategic reasoning. Our model can also be used to understand patterns of behavior for which the cost-benefit approach does not seem to hold.

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“…Formally: for any a , a ∈ A, let the payoff function u a →a be identical to u except that u a →a (a , ω) = u (a , ω) for any ω. 5 Then:…”

Section: Expected Value Of Reasoningmentioning

confidence: 99%

Cost-Benefit Analysis in Reasoning

Chrifi‐Alaoui

Penta

2022

Journal of Political Economy

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“…6 Experimental evidence suggests that subjects' levels are correlated with observable variables, if not perfectly predictable (e.g. Agranov, Potamites, Schotter, and Tergiman, 2012;Alaoui and Penta, 2016;Alaoui, Janezic, and Penta, 2020). Even imperfect correlations sometimes influence applications (e.g.…”

Section: Introductionmentioning

confidence: 99%

Efficient mechanisms for level-k bilateral trading

Crawford

2021

Games and Economic Behavior

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This paper revisits Myerson and Satterthwaite's (1983) classic analysis of mechanism design for bilateral trading, replacing equilibrium with a level-k model of strategic thinking and focusing on direct mechanisms. The revelation principle fails for level-k models, so restricting attention to direct mechanisms and imposing incentive-compatibility are not without loss of generality. If, however, only direct, level-k-incentive-compatible mechanisms are feasible and traders' levels are observable, Myerson and Satterthwaite's characterization of mechanisms that maximize traders' total surplus subject to incentive constraints generalizes qualitatively to levelk models. If only direct, level-k-incentive-compatible mechanisms are feasible but traders' levels are not observable, generically a particular posted-price mechanism maximizes traders' total expected surplus subject to incentive constraints. If direct, non-level-k-incentive-compatible mechanisms are feasible and traders best respond to them, total expected surplus-maximizing mechanisms may take completely different forms.

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“…Because we obtain the same qualitative comparative statics on the value regardless of the exact assumptions on non-economic factors, our predictions can be tested even if the relevant non-economic factors cannot be observed. By contrast, much of the behavioral game theory literature estimates the relevant behavioral parameters from data, with the notable exception of Alaoui and Penta (2016) and Alaoui et al (2020) who provide testable comparative statics for level-k models and test their predictions experimentally. 8 Instead of assuming that the relevant parameters can be estimated from the data, we focus on predictions that are independent of the precise behavioral parameters.…”

Section: Introductionmentioning

confidence: 99%

The Value of a Coordination Game

Kets¹,

Kager²,

Sandroni³

2021

Preprint

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The value of a game is the payoff a player can expect (ex ante) from playing the game. Understanding how the value changes with economic primitives is critical for policy design and welfare. However, for games with multiple equilibria, the value is difficult to determine. We therefore develop a new theory of the value of coordination games. The theory delivers testable comparative statics on the value and delivers novel insights relevant to policy design. For example, policies that shift behavior in the desired direction can make everyone worse off, and policies that increase everyone's payoffs can reduce welfare.

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Reasoning about others' reasoning

Cited by 30 publications

References 22 publications

Cost-Benefit Analysis in Reasoning

Cost-Benefit Analysis in Reasoning

Efficient mechanisms for level-k bilateral trading

The Value of a Coordination Game

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