Strategic thinking : experimental investigation and economic theory

• Main Author: Penczynski, Stefan Peter
• Published: London School of Economics and Political Science (University of London) 2009
• Subjects: 330.01
• Online Access: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.645854

Strategic interaction has traditionally been modelled in economics with game theoretic equilibrium models. In these models, strategies constitute best responses to beliefs that are consistent with other players' strategies. While this consistency is realistic in settings familiar to the players, it is less appropriate in situations that are encountered for the first time. This shortcoming has led to the conception of models of bounded rationality, in particular the level-k model of levels of reasoning. While experimental studies usually employ only action data to test the level-k model, in this thesis, a team setup with electronic communication between participants allows for a qualitatively richer insight in actual reasoning processes. Two different games are played to investigate different notions of strategic thinking. The first study uses a dominance-solvable 'beauty contest' game in which 6-8 teams compete for a prize. This game lends itself naturally to the observation of levels of reasoning. In addition, the communication allows to analyse the anchoring level-0 belief and the population belief of individual players. The second study uses a zero-sum 'hide and seek' game that two teams play against each other. Both the influence of non-neutral framing on the level-0 belief and the task-dependence of the level of reasoning can be brought to light in this study. The third and final chapter considers an application of the equilibrium concept in the theory of implicit incentives, a situation of complex strategic interaction. The method and results of the study are viewed against the background of the limitations of equilibrium models to reflect a situation of inherent one-shot nature.