Schedule - Parallel Session 6 - Intelligence and Strategic Behaviour 2WMG IMC Boardroom 2 - 15:40 - 17:10
Action-Dependent Beliefs: Could Game Theory Be Bad for You?
Peter J. Hammond
Several past experiments have sought to elicit participants’ beliefs about other players’ strategic behaviour, and then to test the best response hypothesis that players maximize their expected payoffs given these beliefs. To date, these beliefs were restricted to be independent of a player’s own action, in which case no dominated strategy is ever a best response. To accommodate observed choices of dominated strategies, this paper discusses an alternative experiment allowing participants to state beliefs that are action-dependent ” i.e., they may depend on the player’s own action. We allow beliefs to be action-dependent. Such beliefs made their first significant appearance in Newcomb’s Problem, named after the physicist William Newcomb who originally devised it as a thought experiment. The problem was analyzed in depth by the philosopher Robert Nozick (1969), and discussed a few years later in Scientific American (e.g., Gardner 1974). The hypothesis to be investigated here is whether similar action-dependent beliefs could help to explain observed behaviour in experimental games better than is possible with the more restrictive action-independent beliefs that feature in earlier work. To test this hypothesis, we have conducted an incentivized laboratory experiment in three stages. Throughout participants were faced with a variety of strategic games that had previously been used to elicit players’ beliefs and to test the best response hypothesis. The key difference in our experiment was that participants were explicitly allowed to report both action-dependent and action-independent beliefs, along with their decisions in these strategic games. We compared participants’ actual decisions with: (i) Nash equilibrium predictions; (ii) their best-responses given their own stated action-independent beliefs (henceforth, AIB); as well as (iii) their best responses given their own stated action-dependent beliefs (henceforth, ADB). Our major finding is that allowing action-dependence explains the data better than other prominent alternatives. Our results (1) suggest that action-dependent beliefs could play an important role in explaining observed behavior, as well as beliefs, in strategic games; and (2) call for further research about the comparative descriptive and predictive power of both types of beliefs.
Diversity in Cognitive Ability Enlarges Mispricing
Nobuyuki Hanaki; Eizo Akiyama; Yukihiko Funaki; Ryuichiro Ishikawa
How does known diversity in cognitive ability among market participants influence market outcomes? We investigated this question by first measuring subjects’ cognitive ability and categorizing them as ‘H’ type for those above median ability and ‘L’ type for those below median ability. We then constructed three kinds of markets with six traders each: 6H, 6L, and 3H3L. Subjects were informed of their own cognitive type and that of the others in their market. We found heterogeneous markets (3H3L) generated significantly larger mispricing than homogeneous markets (6H or 6L). Thus, known diversity in cognitive ability among market participants impacts mispricing.
(F)Lexicographic Shortlist Method
We propose a new model of boundedly rational choice, the flexicographic shortlist method (FSM), that introduces menu-dependence into the idea of lexicographic preferences. The standard lexicographic choice procedure assumes a fixed sequence in which several decision criteria are applied to gradually narrow down the set of available alternatives. We depart from that by refraining from stipulating the order in which two fixed criteria are applied. Rather the consistency that our model retains lies in the fact that it is the same set of criteria that are applied to each choice problem. Our model generalizes the idea of lexicographic semiorders by Tversky (1969) and the rational shortlist method by Manzini and Mariotti (2007), because the FSM essentially provides a non-probabilistic account of the prominent elimination by aspects procedure by Tversky (1972). To arrive at her choice, a decision maker following the FSM narrows down the set of available alternatives by sequentially applying two asymmetric binary relations (rationales) and by dropping those alternatives that are inferior with respect to the current rationale in the sequence. Our procedure can explain a wide range of experimental findings that report choice anomalies in the form of choice cycles (May 1954) or context-dependent choice like the attraction effect (Huber, Payne, and Puto 1982) or the compromise effect (Simonson 1989). Most notably, the structure of the FSM is very close to the psychological interpretation of how these phenomena emerge. We study several properties of our choice procedure and provide a full behavioral characterization that further develops the idea of confirmed revealed preference in Manzini and Mariotti (2007).
Higher Intelligence Groups Have Higher Cooperation Rates in the Repeated Prisoner's Dilemma
Intelligence affects social outcomes of groups. A systematic study of the link is provided in an experiment where two groups of subjects with different levels of intelligence, but otherwise similar, play a repeated prisoner’s dilemma. The initial cooperation rates are similar, it increases in the groups with higher intelligence to reach almost full cooperation, while declining in the groups with lower intelligence. The difference is produced by the cumulation of small but persistent differences in the response to past cooperation of the partner. In higher intelligence subjects, cooperation after the initial stages is immediate and becomes the default mode, defection instead requires more time. For lower intelligence groups this difference is absent. Cooperation of higher intelligence subjects is payoff sensitive, thus not automatic: in a treatment with lower continuation probability there is no difference between different intelligence groups.