Presentation on theme: "Shengen Zhai. Nash Equilibrium ◦ High cognitive requirements ◦ Weakness: it states neither how people do behave nor how they should behave in an absolute."— Presentation transcript:
Nash Equilibrium ◦ High cognitive requirements ◦ Weakness: it states neither how people do behave nor how they should behave in an absolute sense, but how they could behave in the perfect world to remain the status stable. Conclusion: Narrative Models
Level-K thinking model ◦ Players have different levels of strategic sophistication hence behave heterogeneously ◦ L0 players; L1 players; Lk players; use simplified models that avoid the complexity of equilibrium ◦ Example: Nagel’s “guess the half of average” game
Level-K Auction Model ◦ Extend Level-K Model into complicated games ◦ truthful L0 bidder; random L0 bidder ◦ “truthful L1 bidder”, “truthful L2 bidder” … ; “random L1 bidder”, “random L2 bidder” … ◦ Main result is to determine the amount of variance in players’ behavior that could explained by the model Conclusion: Descriptive Models
Limitation of Level-K Thinking Model ◦ Poor transferability of players’ levels across different games Predictive Level-K Thinking Model ◦ Invariant type underlying every player ◦ Measurable as a combination of cognitive abilities ◦ Exhibited level=f (type, game) ◦ Levels of strategic sophistication predictable based on types and the results from comparable games
Main goal ◦ To determine cognitive requirements for each strategy level in different auction mechanisms ◦ To test the transferability of the cognitive requirements among different auction mechanisms Additional goal ◦ To examine L-0 assumption in Level-K auction model ◦ To examine the assumption of the best responses among adjacent levels
Multidimensional Predictive Model ◦ Unlikely to have a univariate cognitive type ◦ Plausible to have a multidimensional invariant type ◦ Each dimension is independent and measurable as a combination of cognitive abilities ◦ Exhibited level=F(related dimensions of type, game) ◦ Levels of strategic sophistication predictable based on types and the results from the games of the same characteristics and comparable difficulties
Relationship between cognitive abilities and levels will be lost during the learning process. Economic justification: ◦ Players with less cognitive abilities acquire the knowledge of sophisticated strategies without independently deriving the strategies
L0 strategies are noisy in complicated games ◦ Economic justification: L0 players do not behave uniformly due to no obvious basic strategy.
L1 are not optimally responding to L0 in complicated games ◦ Economic justification: in complicated games, L0’s behaviors are ambiguous; it is not possible for L1 develop optimal strategies.