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44
Cognition and Behavior in TwoPerson Guessing games
 An Experimental Study’, American Economic Review
, 2006
"... This paper reports an experiment that elicits subjects ’ initial responses to 16 dominancesolvable twoperson guessing games. The structure is publicly announced except for varying payoff parameters, to which subjects are given free access. Varying the parameters allows very strong separation of th ..."
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Cited by 100 (14 self)
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This paper reports an experiment that elicits subjects ’ initial responses to 16 dominancesolvable twoperson guessing games. The structure is publicly announced except for varying payoff parameters, to which subjects are given free access. Varying the parameters allows very strong separation of the behavior implied by leading decision rules. Subjects ’ decisions and searches show that most subjects understood the games and sought to maximize payoffs, but many had simplified models of others ’ decisions that led to systematic deviations from equilibrium. The predictable component of their deviations is well explained by a structural nonequilibrium model of initial responses based on levelk thinking. (JEL C72, C92, D83)... professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which, to the best of one’s judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth, and higher degrees.
Strategic price complexity in retail financial markets
 Forthcoming Journal of Financial Economics
, 2008
"... There is mounting empirical evidence to suggest that the law of one price is violated in retail financial markets: there is significant price dispersion even when products are homogeneous. Also, despite the large number of firms in the market, prices remain above marginal cost and may even rise as m ..."
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Cited by 30 (3 self)
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There is mounting empirical evidence to suggest that the law of one price is violated in retail financial markets: there is significant price dispersion even when products are homogeneous. Also, despite the large number of firms in the market, prices remain above marginal cost and may even rise as more firms enter. In a noncooperative oligopoly pricing model, I show that these anomalies arise when firms add complexity to their price structures. Complexity preserves market power and corporate profits by bounding the financial literacy of consumers. As consumers find it more difficult to find the best deal, more of them optimally choose to remain uninformed about industry prices, which ultimately leads to price dispersion and failure of competition. Professional advice (i.e. an advice channel) removes this advantage, unless the firms increase aggregate complexity, decrease price dispersion across the industry, or institute incentive contracts with the advice channel. Because retail markets are extremely large, such practices have important welfare implications.
Beyond Equilibrium: Predicting Human Behaviour in Normal Form
, 2010
"... It is standard in multiagent settings to assume that agents will adopt Nash equilibrium strategies. However, studies in experimental economics demonstrate that Nash equilibrium is a poor description of human players ’ actual behaviour. In this study, we consider a wide range of widelystudied models ..."
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Cited by 22 (2 self)
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It is standard in multiagent settings to assume that agents will adopt Nash equilibrium strategies. However, studies in experimental economics demonstrate that Nash equilibrium is a poor description of human players ’ actual behaviour. In this study, we consider a wide range of widelystudied models from behavioural game theory. For what we believe is the first time, we evaluate each of these models in a metaanalysis, taking as our data set largescale and publiclyavailable experimental data from the literature. We then propose a modified model that we believe is more suitable for practical prediction of human behaviour. ii Table of Contents Abstract................................... ii
Pinocchio's Pupil: Using Eyetracking and Pupil Dilation to Understand TruthTelling and Deception in Biased Transmission Games. Caltech
, 2006
"... We conduct laboratory experiments on senderreceiver games with an incentive for senders to exaggerate (such as security analysts painting a rosy picture about earnings prospects). Our results show that “overcommunication”—messages are more informative of the true state than they should be, in equil ..."
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Cited by 13 (6 self)
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We conduct laboratory experiments on senderreceiver games with an incentive for senders to exaggerate (such as security analysts painting a rosy picture about earnings prospects). Our results show that “overcommunication”—messages are more informative of the true state than they should be, in equilibrium—is consistent with a levelk model. Eyetracking shows that senders look much more on the payoff rows corresponding to the true state, and much less at receiver payoffs than at their own payoffs. Senders ’ pupils also dilate more when their deception is larger in magnitude. Together, these data are consistent with the hypothesis that figuring out how to deceive another player is cognitively difficult as assumed in the levelk model. A combination of sender messages and lookup patterns predicts the true state about twice as often as predicted by equilibrium. Using these measures would enable receiver subjects to hypothetically earn up to 1621 percent more than they actually do.
Iterated Regret Minimization: A New Solution Concept
"... For some wellknown games, such as the Traveler’s Dilemma or the Centipede Game, traditional gametheoretic solution concepts—most notably Nash equilibrium—predict outcomes that are not consistent with empirical observations. We introduce a new solution concept, iterated regret minimization, which ex ..."
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Cited by 10 (1 self)
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For some wellknown games, such as the Traveler’s Dilemma or the Centipede Game, traditional gametheoretic solution concepts—most notably Nash equilibrium—predict outcomes that are not consistent with empirical observations. We introduce a new solution concept, iterated regret minimization, which exhibits the same qualitative behavior as that observed in experiments in many games of interest, including Traveler’s Dilemma, the Centipede Game, Nash bargaining, and Bertrand competition. As the name suggests, iterated regret minimization involves the iterated deletion of strategies that do not minimize regret. 1
The Tennis Coach Problem: A GameTheoretic and Experimental study
 The B.E. Journal of Theoretical Economics
, 2012
"... The paper introduces a new allocation game, related to Blotto games: each tennis coach assigns his four different skilled players to four positions, and then each team plays all other teams in the tournament. The winning team is the one with the highest total score. The set of equilibria is characte ..."
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Cited by 10 (7 self)
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The paper introduces a new allocation game, related to Blotto games: each tennis coach assigns his four different skilled players to four positions, and then each team plays all other teams in the tournament. The winning team is the one with the highest total score. The set of equilibria is characterized and experimental behavior in variants of the game is analyzed in light of an adapted levelk model which is based on an appealing specification of the starting point (Level0). The results exhibit a systematic pattern a majority of the subjects used a small number of strategies. However, although levelk thinking is naturally specified in this context, only a limited use of (low) levelk thinking was found. These findings differ from those obtained in previous studies, which found high frequencies of levelk reasoning among subjects in various games. Thus, the results illuminate some bounds of the levelk approach. JEL classification: C72, C91
Using iterated reasoning to predict opponent strategies
 In AAMAS
, 2011
"... The field of multiagent decision making is extending its tools from classical game theory by embracing reinforcement learning, statistical analysis, and opponent modeling. For example, behavioral economists conclude from experimental results that people act according to levels of reasoning that form ..."
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Cited by 6 (2 self)
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The field of multiagent decision making is extending its tools from classical game theory by embracing reinforcement learning, statistical analysis, and opponent modeling. For example, behavioral economists conclude from experimental results that people act according to levels of reasoning that form a “cognitive hierarchy ” of strategies, rather than merely following the hyperrational Nash equilibrium solution concept. This paper expands this model of the iterative reasoning process by widening the notion of a level within the hierarchy from one single strategy to a distribution over strategies, leading to a more general framework of multiagent decision making. It provides a measure of sophistication for strategies and can serve as a guide for designing good strategies for multiagent games, drawing it’s main strength from predicting opponent strategies. We apply these lessons to the recently introduced Lemonadestand Game, a simple setting that includes both collaborative and competitive elements, where an agent’s score is critically dependent on its responsiveness to opponent behavior. The opening moves are significant to the end result and simple heuristics have achieved faster cooperation than intricate learning schemes. Using results from the past two realworld tournaments, we show how the submitted entries fit naturally into our model and explain why the top agents were successful.
A Semiparametric Model for Assessing Cognitive Hierarchy Theories of Beauty Contest Games
, 2010
"... Behavioral game theory experiments consistently reveal that individuals deviate from theoretically optimal (Nash equilibrium) strategies even in simple games. The αbeauty contest is among the simplest games that elicit such nonoptimal behavior; accordingly, there is substantial interest in formall ..."
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Cited by 5 (0 self)
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Behavioral game theory experiments consistently reveal that individuals deviate from theoretically optimal (Nash equilibrium) strategies even in simple games. The αbeauty contest is among the simplest games that elicit such nonoptimal behavior; accordingly, there is substantial interest in formally characterizing the observed play for this game. Contributing to such an effort, and building on earlier work by Stahl and Wilson (1995, 1994) and Nagel (1995), Camerer et al. (2004) introduce an intuitively appealing and formally elegant cognitive hierarchy (CH) model of strategic reasoning. Under their model the player population is partitioned according to a Poisson distribution (CHP) and the resulting subgroups are hierarchically ordered in terms of how many steps of iterated reasoning they perform when strategizing. Though the analytic properties of this model provide easily interpretable parameters, we are able to show that the data do not strongly support such a model, at least in the case of the αbeauty contest. In fact, we find no evidence of cognitive hierarchy structure at all. We arrive at this result by developing a rigorous testing methodology consisting of three key components. First, we generalize CHP by developing a flexible semiparametric (SP) CH model which nests many common CH variants. Second, we describe an experiment to collect data specifically tailored to test key assumptions of the CH framework. Finally, we describe an appropriate null model against which to evaluate the ability of CH models to characterize our experimental data. Some key words: behavioral game theory, cognitive hierarchy models, model assessment, bounded rationality. 2 1
Competitive Burnout: Theory and experimental evidence
 Games and Economic Behavior
"... We examine equilibrium selection in a twostage sequential elimination contest in which contestants compete for a single prize. This game has a continuum of equilibria, only one of which satisfies the CoalitionProof Nash Equilibrium (CPNE) refinement. That equilibrium involves “burning out ” by usi ..."
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Cited by 3 (0 self)
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We examine equilibrium selection in a twostage sequential elimination contest in which contestants compete for a single prize. This game has a continuum of equilibria, only one of which satisfies the CoalitionProof Nash Equilibrium (CPNE) refinement. That equilibrium involves “burning out ” by using all of one’s resources in the first stage. It is Paretodominated by many other equilibria. We find that CPNE predicts well when four people compete, but not when eight people compete for two secondstage spots. Using a cognitive hierarchy (CH) framework, we show that when the number of players and the mean number of thinking steps are large, the CH prediction involves burning out. This provides a partial explanation of our results. We also develop a formal argument as to why CPNE logic is more compelling with more players. We conclude that more competition leads to higher bids, and that burning out is indeed a competitive phenomenon.
Iterated Regret Minimization: A More Realistic Solution Concept
, 2008
"... Abstract For some wellknown games, such as the Traveler's Dilemma or the Centipede Game, traditional gametheoretic solution conceptsand most notably Nash equilibriumpredict outcomes that are not consistent with empirical observations. In this paper, we introduce a new solution concept, iterate ..."
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Cited by 2 (1 self)
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Abstract For some wellknown games, such as the Traveler's Dilemma or the Centipede Game, traditional gametheoretic solution conceptsand most notably Nash equilibriumpredict outcomes that are not consistent with empirical observations. In this paper, we introduce a new solution concept, iterated regret minimization, which exhibits the same qualitative behavior as that observed in experiments in many games of interest, including Traveler's Dilemma, the Centipede Game, Nash bargaining, and Bertrand competition. As the name suggests, iterated regret minimization involves the iterated deletion of strategies that do not minimize regret.