Heller, Yuval (2012): Three steps ahead.
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Experimental evidence suggest that people only use 1-3 iterations of strategic reasoning, and that some people systematically use less iterations than others. In this paper, we present a novel evolutionary foundation for these stylized facts. In our model, agents interact in finitely repeated Prisoner's Dilemma, and each agent is characterized by the number of steps he thinks ahead. When two agents interact, each of them has an independent probability to observe the opponent's type. We show that if this probability is not too close to 0 or 1, then the evolutionary process admits a unique stable outcome, in which the population includes a mixture of “naive” agents who think 1 step ahead, and “sophisticated” agents who think 2-3 steps ahead.
|Item Type:||MPRA Paper|
|Original Title:||Three steps ahead|
|Keywords:||Indirect evolution, cognitive hierarchy, bounded forward-looking, Prisoner's Dilemma, Cooperation|
|Subjects:||D - Microeconomics > D0 - General > D03 - Behavioral Economics; Underlying Principles
C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C73 - Stochastic and Dynamic Games; Evolutionary Games; Repeated Games
|Depositing User:||Yuval Heller|
|Date Deposited:||24. Aug 2012 11:18|
|Last Modified:||13. Feb 2013 08:21|
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