Cemmap
(Center for Microdata Methods and Practice) Master Class on “Structural
Nonequilibrium Models of Strategic Thinking: Theory, Measurement, and
Applications” UniversityCollegeLondon5-6
March 2009
Economics
201C Segment on “Behavioral Game Theory: Strategic Thinking” University of California,
San Diego30 March-27 April 2009
Mini-Course
on “Limited Cognition, Strategic Thinking, and Learning in Games” University of Bonn,
GraduateSchool of Economics Summer
School 20-24
July 2009
Vincent P. Crawford,
University of California, San
Diego
Based
on joint work with Miguel A. Costa-Gomes, University of Aberdeen,
and Nagore Iriberri, Universitat Pompeu Fabra
Introduction
Behavioral game theory combines
theory and empirical (mainly experimental) evidence to develop the
understanding of strategic behavior needed to analyze economic,
political, and
social interactions. This understanding includes issues in behavioral
decision
theory such as present-biased or reference-dependent preferences and
biases in
probabilistic judgment, plus some issues that arise only in
multi-person
settings such as altruism, envy, reciprocity, and spite. It also
includes
purely strategic issues such as strategic thinking as revealed by
people's
initial responses to games, the structure of learning rules, and how
the two
interact to determine the dynamics and limiting outcomes of their
interactions.
The master
class/segment/mini-course
will narrow the focus to strategic thinking, taking behavior as
(mostly)
self-interested and rational. Although strategic thinking has important
influences on how people learn (via the structure of learning rules and
how
people extrapolate from experience with imperfectly analogous games),
it
appears in its purest form in initial responses to games played without
clear
precedents. It will be seen that experimental subjects’ initial
responses to
games often deviate systematically from equilibrium, but that there are
common
elements in their deviations that allow certain kinds of structural
non-equilibrium models to consistently out-predict equilibrium models.
Topics include the
design of laboratory
experiments to study strategic thinking, the use of econometric and
other
methods to analyze decision and process data, the leading models that
have been
proposed to describe strategic thinking, the lessons that can be drawn
from experiments
on initial responses to games, and the use of the resulting models to
resolve theoretical
and empirical puzzles in applications that have resisted analysis via
equilibrium, quantal response equilibrium, and related methods.
Outline
of Lectures
1.
Introduction: Why Study Strategic Thinking?
2.
Nine “Folk Game Theory” Quotations (Keynes’s Beauty Contest, Graham’s
Mr.
Market, Kahneman’s Entry Magic, LakeWobegon,
Huarongdao, October
Surprise, Bank Runs, Poe’s Outguessing Game)
3.
Leading Models of Strategic Thinking (Equilibrium Plus Noise, Finitely
Iterated
(Strict) Dominance and k-Rationalizability,
Quantal Response Equilibrium (“QRE”) and Logit QRE (“LQRE”), Level-k Models, Cognitive Hierarchy Models, Noisy
Introspection (“NI”) Models)
4.
Experimental Evidence (Nagel’s Design and Results, Costa-Gomes and
Crawford’s
Design and Results and Data Analysis)
5.
Lessons from the Experiments for Modeling Strategic Behavior (Level-k versus CH Models, Level-k versus
Equilibrium Plus Noise or LQRE
Models, Level-k versus NI Models, Observations
about the Models’ Cognitive Requirements)
6.
Illustration of Level-k Analyses of
Matrix Games with Unique Mixed-Strategy Equilibria: M. M. Kaye’s The Far Pavilions
7.
Kahneman’s Entry Magic: Asymmetric Coordination via Structure in Entry
Games
8.
Bank Runs: Symmetric Coordination via Structure
9.
Structural Alternatives to “Incomplete” Models
10.
Yuschenko and LakeWobegon: Framing
Effects
in Zero-Sum Two-Person Games (Evaluating the Model’s Explanation:
Overfitting
and Portability)
11.
Chicago
Skyscrapers: Framing Effects and Miscoordination in Schelling-Style
Coordination Games
12.
Huarangdao and D-day: Preplay Communication of Intentions in Zero-Sum
Two-Person Games with Possibly Sophisticated Players
13.
Preplay Communication of Intentions in Coordination Games
14.
October Surprise: Preplay Communication of Private Information in
Zero-Sum
Two-Person Games
15.
Overbidding in Independent-Private-Value and Common-Value Auctions
16.
Behaviorally Optimal Auction Design
Readings(the
readings don’t strictly follow
the same order as the lectures, and I have listed many, many more
topics and
readings than we can possibly cover; the most important readings are
marked *)
A. Theory and
Evidence
A1.
Overview of Behavioral Game Theory and Game Experiments
*(henceforth “CC”) Colin Camerer, Behavioral
Game Theory: Experiments on Strategic Interaction, Princeton, 2003: Chapter 1, “Introduction”;
Appendix 1.1,
“Basic Game Theory”; and Appendix 1.2, “Experimental
Design”
*(henceforth “VC”)
Vincent Crawford, “Theory and Experiment in the Analysis of Strategic
Interaction,” Chapter 7 in David Kreps and Ken Wallis (eds.), Advances in Economics and Econometrics:
Theory and Applications, Seventh World Congress, Vol. I, Cambridge
1997;
reprinted with minor changes in Colin Camerer, George Loewenstein, and
Matthew
Rabin, editors, Readings in Behavioral
Economics, Princeton and Russell Sage Foundation, February 2004:
Sections 1,
“Introduction”; 2, “Theoretical Frameworks and Unresolved Questions”;
3, “Experimental Designs”; and 7, “Conclusion”; (in
manuscript form) http://dss.ucsd.edu/~vcrawfor/ShortTh&Exp.pdf
Colin Camerer, “Progress in Behavioral Game Theory,”
Journal
of Economic Perspectives 11(1997),
167-188; http://www.jstor.org/stable/2138470
Vincent
Crawford, “Introduction to
Experimental Game Theory,” Journal of Economic Theory 104(2002), 1-15: Section
1, “Introduction”;doi:10.1006/jeth.2001.2909
Thomas
Schelling, The Strategy of Conflict,Oxford 1960 or
Harvard
1980
David
Kreps, Game Theory and Economic Modelling,Oxford 1990
A2.
Alternative Models of Initial Responses to Games
*CC,
Appendix 1.1, “Basic Game Theory”
*Miguel
Costa-Gomes, Vincent Crawford, and
Nagore Iriberri, “Comparing Models of Strategic Thinking in Van
Huyck, Battalio, and Beil’s
Coordination Games,” Journal of the
European Economic Association 7 (April-May 2009), in press:
Sections 1,
“Introduction”; and 2, “Alternative Models of Initial Responses to
Games”; http://dss.ucsd.edu/~vcrawfor/CGCIJEEA17Oct08.pdf
a.
Equilibrium
*Adam
Brandenburger, “Knowledge and
Equilibrium in Games,” Journal of Economic Perspectives 6 (1992),
83-101; http://www.jstor.org/stable/2138270
b. Equilibrium with
extensive-form refinements: backward and forward
induction
*Philip Reny, “Rationality In
Extensive Form Games,” Journal of
Economic Perspectives 6
(1992), 103-118; http://www.jstor.org/stable/2138271
Robert Aumann, “Backward Induction
and Common Knowledge of Rationality,” Games
andEconomic Behavior 8 (1995),
6-19;
doi:10.1016/S0899-8256(05)80015-6
Elchanen Ben-Porath and Eddie
Dekel, “Signaling Future Actions and the Potential for Sacrifice,” Journal of Economic Theory 57 (1992),
36-51; doi:10.1016/S0022-0531(05)80039-0
c. Equilibrium with
coordination refinements: risk- and
payoff-dominance
John Harsanyi and Reinhard Selten, A General Theory of Equilibrium Selection in
Games, MIT1988
d.
Quantal response equilibrium
*Richard
McKelvey and Thomas Palfrey, “Quantal
Response Equilibria for Normal-FormGames,”
Games and Economic Behavior 10
(1995), 6-38; doi:10.1006/game.1995.1023
Richard
McKelvey and Thomas Palfrey, “Quantal
Response Equilibria for Extensive-Form
Games,” Experimental Economics 1
(1998), 9-41; doi:10.1007/BF01426213
e. Level-k models
*Miguel
Costa-Gomes, Vincent Crawford, and
Nagore Iriberri, “Comparing Models of Strategic Thinking in Van
Huyck, Battalio, and Beil’s
Coordination Games,” Journal of the
European Economic Association 7 (2009), in press: 5-6 (in
manuscript); http://dss.ucsd.edu/~vcrawfor/CGCIJEEA17Oct08.pdf
Dale Stahl and Paul
Wilson, “On Players’ Models of Other Players: Theory
and ExperimentalEvidence,” Games
and Economic Behavior 10 (1995),
218-254;doi:10.1006/game.1995.1031
Rosemarie
Nagel, “Unraveling in Guessing
Games: An Experimental Study,” AmericanEconomic Review 85 (1995), 1313-1326; http://www.jstor.org/stable/2950991
Teck-Hua
Ho, Colin Camerer, and Keith
Weigelt, “Iterated Dominance and Iterated Best Response in Experimental
‘p-Beauty Contests’,” American Economic
Review, 88 (1998),
947-969; http://www.jstor.org/stable/117013
Georg Weizsäcker, “Ignoring the Rationality
of Others:
Evidence from Experimental Normal-Form
Games,” Games
and Economic Behavior 44 (2003), 145-171; doi:10.1016/S0899-8256(03)00017-4
Vincent
Crawford, “Look-ups as the
Windows of the Strategic Soul: Studying Cognition via Information
Search in Game Experiments,” in
Andrew Caplin and Andrew Schotter, editors, Perspectives
on the Future of Economics: Positive and Normative Foundations,
Volume 1,
Handbooks of Economic Methodologies, Oxford University Press, 2008; (in manuscript) http://dss.ucsd.edu/~vcrawfor/12Jan07NYUCognitionSearchMain.pdf
b. Extensive-form games
*CC,
Chapters 4.2, “Structured Bargaining”; 4.3,
“Bargaining with Incomplete Information”;4.4,
“Conclusion”: and 7.2, “Asymmetric Players: Battle of the Sexes”
*VC,
Sections 4.2, “Ultimatum
and alternating-offers bargaining”; and 5.1, “Signaling games”
T.
Randolph Beard and Richard Beil, "Do
People Rely on the Self-interested Maximization of Others? An
Experimental
Test," Management Science 40
(1994), 252-262; http://www.jstor.org/stable/2632764
Richard McKelvey and Thomas Palfrey,
“An Experimental Study of the Centipede Game,”Econometrica 60 (1992), 803-836; http://www.jstor.org/stable/2951567
David
Cooper and John Van Huyck, “Evidence on
the Equivalence of the Strategic and Extensive Form Representation of
Games,” Journal of Economic Theory
110 (2003), 290-308; doi:10.1016/S0022-0531(03)00040-1
Vincent
Crawford, “Introduction to
Experimental Game Theory,” Journal of EconomicTheory 104(2002), 1-15: Section
2, “Backward Induction, Social Preferences, Implementation, and Preplay
Communication
in Extensive-Form Games” introduces next two papers;doi:10.1006/jeth.2001.2909
Eric Johnson, Colin Camerer, Sankar
Sen, and Talia Rymon, “Detecting Failures of Backward Induction:
Monitoring Information Search in Sequential Bargaining,” Journal
of Economic Theory 104 (2002), 16-47; doi:10.1006/jeth.2001.2850
Ken
Binmore, John McCarthy, Giovanni Ponti,
Larry Samuelson, and Avner Shaked, “A Backward Induction Experiment,” Journal of Economic Theory 104(2002),
48-88; doi:10.1006/jeth.2001.2910
Teck-Hua
Ho and Keith Weigelt, “Task
Complexity, Equilibrium Selection, and Learning: An Experimental
Study,” Management Science 42 (1996), 659-679; http://www.jstor.org/stable/2634458
Colin Camerer and Eric Johnson, “Thinking
About Attention in Games: Backward and Forward Induction,” in
Isabel Brocas and Juan Carrillo (editors), The
Psychology of Economic Decisions, Volume Two: Reasons and Choices, Oxford, 2004;
linked in
manuscript at (http://www.hss.caltech.edu/~camerer/ericchap5.pdf)
Vincent
Crawford, “A Survey of Experiments on Communication via Cheap Talk,” Journal ofEconomic Theory 78
(1998), 286-298;
doi:10.1006/jeth.1997.2359
Russell Cooper, Douglas DeJong,
Robert Forsythe, and Thomas Ross, “Alternative Institutions for
Resolving Coordination
Problems: Experimental Evidence on Forward Induction and Preplay
Communication,” 129-146 in James Friedman (ed.), Problems
of Coordination in Economic Activity, Boston: Kluwer, 1994
c.
Unstructured bargaining games
*CC,
Chapter 4.1, “Unstructured Bargaining”
*VC, Chapter 5.3,
“Unstructured Bargaining”
Alvin Roth, “Bargaining Phenomena
and Bargaining Theory,” Chapter 2 in Roth (ed.), Laboratory
Experimentation in Economics: Six
Points of View, Cambridge,
1987
Alvin Roth, “Toward a Focal-Point
Theory of Bargaining,” Chapter 12 in Roth, (ed.),Game-Theoretic Models of Bargaining, Cambridge, 1985
B. Applications
B1. Coordination via
Symmetry-Breaking in Market-Entry
and Battle
of
the Sexes Games
Kahneman,
Daniel, “Experimental Economics: A
Psychological Perspective,” in R. Tietz, W. Albers,and
R. Selten, editors, Bounded Rational
Behavior in Experimental Games and Markets. NewYork:
Springer-Verlag,
1988: 11–18.
Rapoport,
Amnon, and Darryl A. Seale,
“Coordination Success in Noncooperative Large Group Market Entry
Games.” In
Rami Zwick and Amnon Rapoport, editors, Experimental
Business Research. Dordrecht, The Netherlands:
Kluwer Academic, 2002.
*Vincent
Crawford, “Let’s Talk It
Over: Coordination via Preplay Communication with Level-kThinking,” manuscript of paper
presented as Keynote address, Arne Ryde Symposium on
Communication in
Games and Experiments, LundUniversity, August
2007:
Section I, “A Level-k Model of Tacit
Coordination”; http://dss.ucsd.edu/~vcrawfor/LetsTalk13Aug07.pdf
Andres Aradillas-Lopez and Elie Tamer,
“The Identification Power of Equilibrium in SimpleGames,”
Journal of Business & Economic
Statistics 26 (2008), 261-283;http://dx.doi.org/10.1198/073500108000000105
B2. Outguessing in Zero-Sum Games with Non-neutrally
Framed Locations
Chivers,
C. J. (2004), “A Dinner in Ukraine
Made for Agatha Christie,” The New York
Times, December 20, 2004, A1.
Attali,
Yigal, and Maya Bar-Hillel, “Guess Where: The Position of Correct
Answers in
Multiple-ChoiceTest Items as a Psychometric
Variable,” Journal of Educational Measurement, 40
(2003),
109-128.
Keillor,
Garrison, Wobegon Boy. New York: Penguin, 1997.
B3. Coordination via Structure and Framing
in Bargaining and Coordination Games
Thomas Schelling, The
Strategy of Conflict,Oxford
1960 or Harvard
1980: Chapter 3,“Bargaining,
Communication, and Limited War”, and Appendix C
Judith
Mehta, Chris Starmer, and Robert Sugden, “The Nature of Salience: AnExperimental Investigation of Pure
Coordination Games,” American EconomicReview 84 (1994), 658-674; http://www.jstor.org/stable/2118074
*Miguel
Costa-Gomes, Vincent Crawford, and
Nagore Iriberri, “Comparing Models of Strategic Thinking in Van
Huyck, Battalio, and Beil’s
Coordination Games,” Journal of the
European Economic Association 7 (April-May 2009), in press:
Section 3, “Van
Huyck, Battalio, and Beil’s (1990, 1991) coordination games”; http://dss.ucsd.edu/~vcrawfor/CGCIJEEA17Oct08.pdf
Lawrence Summers, “International
Financial Crises: Causes, Prevention, and Cures,” AmericanEconomic Review 90 (2000), 1-16
(especially 7); http://www.jstor.org/stable/117183
Morris,
Stephen, and Shin, Hyun Song, “Unique
Equilibrium in a Model of Self-Fulfilling CurrencyAttacks,”
American Economic Review 88 (1998), 587-97;
http://www.jstor.org/stable/116850
Hans
Carlsson and Mattias Ganslandt, “Noisy Equilibrium Selection in
Coordination Games,”Economics
Letters 60 (1998), 23–34; doi:10.1016/S0165-1765(98)00076-7
Ivana
Komunjer and Federico Echenique, “Testing Models with Multiple
Equilibria by QuantileMethods,” Econometrica (forthcoming)
Ernst Fehr
and Jean-Robert Tyran, “Individual
Irrationality and Aggregate Outcomes,” Journalof
Economic Perspectives 19 (2005), 43–66; http://www.jstor.org/stable/4134954
Ernst Fehr
and Jean-Robert Tyran, “Money
Illusion and Coordination Failure,” Games
andEconomic Behavior 58 (2007),
246-268; doi:10.1016/j.geb.2006.04.005
Vincent Crawford, “Let’s Talk It
Over: Coordination via Preplay Communication with Level-kThinking,” manuscript presented at
Arne Ryde Symposium on Communication in Gamesand
Experiments, August 2007; http://dss.ucsd.edu/~vcrawfor/#Talk
B7. Strategic Communication of Private Information
Vincent
Crawford and Joel Sobel, “Strategic Information Transmission,”
Econometrica 50 (1982), 1431-1451;
http://www.jstor.org/stable/1913390
Joseph Farrell,
“Meaning and Credibility in Cheap-Talk Games,” Games and EconomicBehavior 5
(1993), 514-531;
doi:10.1006/game.1993.1029
Kartik, Navin, Marco Ottaviani, and Francesco
Squintani, “Credulity, lies, and costly talk,” Journal of Economic Theory 134 (2007), 93-116; doi:10.1016/j.jet.2006.04.003
Hongbin Cai and Joseph Wang,
“Overcommunication in Strategic Information TransmissionGames,”
Games and Economic Behavior 56 (2006),
7–36; doi:10.1016/j.geb.2005.04.001
Joseph Wang, Michael Spezio, and
Colin Camerer, “Pinocchio’s Pupil: Using Eyetracking andPupil
Dilation To Understand Truth–telling and Deception in Games,” 2006;http://www.hss.caltech.edu/~camerer/pinocchio2.pdf
Toshiji
Kawagoe and Hirokazu Takizawa, “Equilibrium Refinement vs. Level-k Analysis: An Experimental
Study of Cheap-Talk Games with Private Information,” Games
and Economic
Ulrike
Malmendier and Devin Shanthikumar, “Are Small Investors Naive about
Incentives?,”Journal of Financial
Economics 85 (2007),
457-489; doi:10.1016/j.jfineco.2007.02.001
Ron
Suskind, The One Percent Doctrine, New York: Simon
and
Schuster, 2006.
Jacob Goeree, Charles Holt, and Thomas
Palfrey, “Quantal Response Equilibrium and Overbidding in
Private-Value Auctions,” Journal of
Economic Theory, 104 (2002), 247-272; doi:10.1006/jeth.2001.2914
*Vincent
Crawford and Nagore Iriberri, “Level-k
Auctions: Can Boundedly Rational Strategic Thinking Explain the
Winner’s Curse and Overbidding in
Private-Value Auctions?,” Econometrica
75 (2007), 1721–1770;http://dss.ucsd.edu/~vcrawfor/#Auctions
Jonathan Skinner, “Purification
of a Mixed Strategy Equilibrium,” Journal
of Political Economy 116
(2008), back cover; doi:10.1086/595969
Philippe
Jehiel and Frédéric Koessler, “Revisiting
Games of Incomplete Information with Analogy-Based Expectations,”
Games and Economic Behavior 62 (2008)
533-557; doi:10.1016/j.geb.2007.06.006
Asen
Ivanov, Dan
Levin, and James Peck, “Hindsight, Foresight, and Insight: An
Experimental Study of a
Small-Market Investment Game with Common and Private Values,” American Economic Review 99 (2009), in
press; http://www.e-aer.org/accepted/20070475.pdf
Alexander Brown,
Colin
Camerer, and Dan Lovallo, “To Review or Not To Review? Limited
Strategic Thinking at the Movie Box Office,” 2008; http://econweb.tamu.edu/abrown/cold.pdf
doi:10.1016/S0899-8256(05)80015-6