Schedule - Parallel Session 5 - Intelligence and Strategic Behaviour 1WMG IMC Boardroom 2 - 14:00 - 15:30
Cost-Benefit Analysis in Reasoning
Larbi Alaoui; Antonio Penta
When an individual thinks about a problem, his decision to reason further may involve a tradeoff between cognitive costs and a notion of value. But it is not obvious that this is always the case, and the value function is not well-defined. This paper analyzes the primitive properties of the reasoning process that must hold for the decision to stop thinking to be represented by a cost-benefit analysis. We find that the properties that characterize the cost-benefit representation are weak and intuitive, suggesting that such a representation is justified for a large class of problems. We then provide additional properties that give more structure to the value of reasoning function, including “value of information” and “maximum gain” representations. We also apply our model to sequential heuristics in choice, particularly the well-known rational shortlist method (Manzini and Mariotti (2007)), and discuss how our model can be used from a positive and normative perspective. Lastly, to analyze the limits of the cost-benefit approach, we consider psychological phenomena which cannot be cast in this domain. We show that different psychological mechanisms for these phenomena map to distinct violations of properties of the reasoning process.
Ciril Bosch Rosa
Smith et al. (1988) reported large bubbles and crashes in experimental asset markets, a result that has been replicated many times. Here we test whether the occurrence of bubbles depends on the experimental subjects’ cognitive sophistication. In a two-part experiment, we first run a battery of tests to assess the subjects’ cognitive sophistication and classify them into low or high levels of cognitive sophistication. We then invite them separately to two asset market experiments populated only by subjects with either low or high cognitive sophistication. We observe classic bubble-crash patterns in the sessions populated by subjects with low levels of cognitive sophistication. Yet, no bubbles or crashes are observed with our sophisticated subjects. This result lends strong support to the view that the usual bubbles and crashes in experimental asset markets are caused by subjects’ confusion and, therefore, raises some doubts about the relevance of this type of experiments.
Cognitive Ability, Character Skills, and Learning to Play Equilibrium: A Level-K Analysis
In this paper we investigate how cognitive ability and character skills influence behavior, success and the evolution of play towards Nash equilibrium in repeated strategic interactions. We study behavior in a p-beauty contest experiment and find striking differences according to cognitive ability: more cognitively able subjects choose numbers closer to equilibrium, converge more frequently to equilibrium play and earn more even as behavior approaches the equilibrium prediction. To understand better how subjects with different cognitive abilities learn differently, we estimate a structural model of learning based on level-k reasoning. We find a systematic positive relationship between cognitive ability and levels; furthermore, the average level of more cognitively able subjects responds positively to the cognitive ability of their opponents, while the average level of less cognitively able subjects does not respond. Finally, we compare the influence of cognitive ability to that of character skills, and find that both cognition and personality affect behavior and learning. More agreeable and emotionally stable subjects perform better and learn faster, although the effect of cognitive ability on behavior is stronger than that of character skills.
Who Knows it is a Game? On Strategic Awareness and Cognitive Ability
Dietmar Fehr; Staffen Huck
We examine strategic awareness in experimental games, that is, the question of whether subjects realize they are playing a game and thus have to form beliefs about others’ actions. We conduct a beauty contest game and elicit measures of cognitive ability and beliefs about others’ cognitive ability. We show that the effect of cognitive ability is highly non-linear. Subjects below a certain threshold choose numbers in the whole interval and their behavior does not correlate with beliefs about others’ ability. In contrast, subjects who exceed the threshold avoid choices above 50 and react very sensitively to beliefs about the cognitive ability of others.