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Strategic Thinking

  • Communication
  • Economics
  • Mathematics


StrategicThinking 1 STRATEGIC THINKING Vincent P. Crawford, Miguel A. Costa-Gomes, and Nagore Iriberri1 28 December 2010 Abstract: Most applications of game theory assume equilibrium, justified by presuming that learning will have converged to one; or in settings where that is implausible, that equilibrium approximates people’s strategic thinking without learning. Yet recent experimental work suggests that initial responses to many kinds of games deviate systematically from equilibrium, and that certain nonequilibrium models can then out-predict equilibrium models of thinking. Even when learning converges to equilibrium, such nonequilibrium models of initial responses allow better prediction of history-dependent limiting outcomes. This paper reviews recent theoretical and empirical work on nonequilibrium models of strategic thinking and illustrates their applications in economics. Keywords: behavioral game theory, experimental game theory, strategic thinking, Nash equilibrium, quantal response equilibrium, level-k models, cognitive hierarchy models, coordination, salience, strategic communication JEL codes: C72, C92, C51 Table of Contents 1. Introduction 2. Alternative Models of Strategic Thinking 3. Keynes’ Beauty Contest: Experimental Evidence from Guessing and Other Normal-Form Games 4. M. M. Kaye’s Far Pavilions: Responding to Payoff Asymmetries in Outguessing Games 5. Groucho’s Curse: Zero-Sum Betting and Auctions with Incomplete Information 6. Kahneman’s Entry Magic: Coordination via Symmetry-Breaking 7. Bank Runs: Coordination via Assurance 8. Nonequilibrium Econometrics: Structural Alternatives to Incomplete Models 9. Yushchenko and Lake Wobegon: Non-neutral Framing in Outguessing Games 10. Mr. Schelling Goes to Chicago: Coordination via Payoff Asymmetries and Non-neutral Framing 11. Huarangdao and D-Day: Communication of Intentions in Outguessing Games 12. Alphonse and Gaston: Communication of Intentions in Coordination Games

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