Advertisement

Experimental Economics

, Volume 19, Issue 4, pp 713–726 | Cite as

Who knows it is a game? On strategic awareness and cognitive ability

  • Dietmar FehrEmail author
  • Steffen Huck
Original Paper

Abstract

We examine strategic awareness in experimental games, that is, the question of whether subjects realize they are playing a game and thus have to form beliefs about others’ actions. We conduct a beauty contest game and elicit measures of cognitive ability and beliefs about others’ cognitive ability. We show that the effect of cognitive ability is highly non-linear. Subjects below a certain threshold choose numbers in the whole interval and their behavior does not correlate with beliefs about others’ ability. In contrast, subjects who exceed the threshold avoid choices above 50 and react very sensitively to beliefs about the cognitive ability of others.

Keywords

Cognitive ability Beliefs Beauty contest Strategic sophistication Strategic awareness 

JEL Classification

C7 C9 D0 

Notes

Acknowledgments

We thank the Editor, Jacob Goeree, and two anonymous reviewers for thoughtful comments. We are also grateful to Terry Burnham, Brit Grosskopf, Rosemarie Nagel, Joerg Oechssler and Andrew Schotter for helpful conversations as well as seminar participants for comments. We thank David Cesarini, Pablo Branas-Garza and Teresa Garcia-Munoz for sharing their data. Financial support from the Deutsche Forschungsgemeinschaft (DFG) through the SFB 649 “Economic Risk” is gratefully acknowledged.

Supplementary material

10683_2015_9461_MOESM1_ESM.pdf (134 kb)
Supplementary material 1 (PDF 133 kb)

References

  1. Agarwal, S., & Mazumder, B. (2013). Cognitive abilities and household financial decision making. American Economic Journal: Applied Economics, 5(1), 193–207.Google Scholar
  2. Agranov, M., Caplin, A., & Tergiman, C. (2015). Naive play and the process of choice in guessing games. Journal of the Economic Science Association (forthcoming).Google Scholar
  3. Agranov, M., Potamites, E., Schotter, A., & Tergiman, C. (2012). Beliefs and endogenous cognitive levels: An experimental study. Games and Economic Behavior, 75(2), 449–463.CrossRefGoogle Scholar
  4. Alaoui, L., & Penta A. (2015). Endogenous depth of reasoning. Review of Economic Studies (forthcoming).Google Scholar
  5. Allred, S., Duffy, S., & Smith, J. (2014). Cognitive load and strategic sophistication. New York: Mimeo.Google Scholar
  6. Benjamin, D. J., Brown, S. A., & Shapiro, J. M. (2013). Who is behavioral? Cognitive ability and anomalous preferences. Journal of the European Economic Association, 11(6), 1231–1255.CrossRefGoogle Scholar
  7. Branas-Garza, P., Garcia-Munoz, T., & Gonzalez, R. (2012). Cognitive effort in the beauty contest game. Journal of Economic Behavior & Organization, 83(2), 254–260.CrossRefGoogle Scholar
  8. Burchardi, K., & Penczynski, S. (2014). Out of your mind: Eliciting individual reasoning in one shot games. Games and Economic Behavior, 84, 39–57.CrossRefGoogle Scholar
  9. Burks, S. V., Carpenter, J. P., Goette, L., & Rustichini, A. (2009). Cognitive skills affect economic preferences, strategic behavior, and job attachment. Proceedings of the National Academy of Sciences, 106(19), 7745–7750.CrossRefGoogle Scholar
  10. Burnham, T. C., Cesarini, D., Johannesson, M., Lichtenstein, P., & Wallace, B. (2009). Higher cognitive ability is associated with lower entries in a p-beauty contest. Journal of Economic Behavior & Organization, 72(1), 171–175.CrossRefGoogle Scholar
  11. Camerer, C. F., & Lovallo, D. (1999). Overconfidence and excess entry: An experimental approach. American Economic Review, 89(1), 306–318.CrossRefGoogle Scholar
  12. Carpenter, J., Graham, M., & Wolf, J. (2013). Cognitive ability and strategic sophistication. Games and Economic Behavior, 80, 115–130.CrossRefGoogle Scholar
  13. Chater, N., Huck, S., & Inderst, R. (2010). Consumer decision making in retail financial services. Report prepared for SANCO/EC.Google Scholar
  14. Chou, E., Margaret, M., Rosemarie, N., & Plott, C. (2009). The control of game form recognition in experiments: Understanding dominant strategy failures in a simple two person “guessing” game. Experimental Economics, 12(2), 159–179.CrossRefGoogle Scholar
  15. Christelis, D., Tullio, J., & Padula, M. (2010). Cognitive abilities and portfolio choice. European Economic Review, 54(1), 18–38.CrossRefGoogle Scholar
  16. Coricelli, G., & Nagel, R. (2009). Neural correlates of depth of strategic reasoning in medial prefrontal cortex. Proceedings of the National Academy of Sciences: Economic Sciences, 106(23), 9163–9168.CrossRefGoogle Scholar
  17. Costa-Gomes, M. A., & Crawford, V. P. (2006). Cognition and behavior in two-person guessing games: An experimental study. American Economic Review, 96(5), 1737–1768.CrossRefGoogle Scholar
  18. Crawford, V. P., Costa-Gomes, M. A., & Iriberri, N. (2013). Structural models of nonequilibrium strategic thinking: Theory, evidence, and applications. Journal of Economic Literature, 51(1), 5–62.CrossRefGoogle Scholar
  19. Dohmen, T., Falk, A., Huffman, D., & Sunde, U. (2010). Are risk aversion and impatience related to cognitive ability? American Economic Review, 100(3), 1238–1260.CrossRefGoogle Scholar
  20. Fang, H., Keane, M. P., & Silverman, D. (2008). Sources of advantageous selection: Evidence from the medigap insurance market. Journal of Political Economy, 116(2), 303–350.CrossRefGoogle Scholar
  21. Fehr, D. (2013). Foregone costly communication and coordination failure. New York: Mimeo.Google Scholar
  22. Fischbacher, U. (2007). z-Tree: Zurich toolbox for ready-made economic experiments. Experimental Economics, 10(2), 171–178.CrossRefGoogle Scholar
  23. Frederick, S. (2005). Cognitive reflection and decision making. Journal of Economic Perspectives, 19(4), 25–42.CrossRefGoogle Scholar
  24. Georganas, S., Healy, P., & Weber, R. (2015). On the persistence of strategic sophistication. Journal of Economic Theory (forthcoming).Google Scholar
  25. Gill, D., & Prowse, V. (2015). Cognitive ability, character skills, and learning to play equilibrium: A level-k analysis. Journal of Political Economy (forthcoming).Google Scholar
  26. Goldfarb, A., & Xiao, M. (2011). Who thinks about the competition? Managerial ability and strategic entry in US local telephone markets. American Economic Review, 101(5), 3130–3161.CrossRefGoogle Scholar
  27. Greiner, B. (2015). Subject pool recruitment procedures: Organizing experiments with ORSEE. Journal of the Economic Science Association, 1(1), 114–125.CrossRefGoogle Scholar
  28. Grimm, V., & Mengel, F. (2012). An experiment on learning in a multiple games environment. Journal of Economic Theory, 147(6), 2220–2259.CrossRefGoogle Scholar
  29. Grosskopf, B., & Nagel, R. (2008). The two-person beauty contest. Games and Economic Behavior, 62(1), 93–99.CrossRefGoogle Scholar
  30. Ho, T.-H., Camerer, C., & Weigelt, K. (1998). Iterated dominance and iterated best response in experimental p-beauty contests. American Economic Review, 88(4), 947–969.Google Scholar
  31. Hoppe, E., & Kusterer, D. J. (2011). Behavioral biases and cognitive reflection. Economics Letters, 110(2), 97–100.CrossRefGoogle Scholar
  32. Huck, S., Normann, H.-T., & Oechssler, J. (1999). Learning in cournot oligopoly: An experiment. Economic Journal, 109(454), C80–C95.CrossRefGoogle Scholar
  33. Huck, S., & Weizsäcker, G. (1999). Risk, complexity, and deviations from expected-value maximization. Journal of Economic Psychology, 20(6), 699–715.CrossRefGoogle Scholar
  34. Inderst, R., & Ottaviani, M. (2012). How (not) to pay for advice: A framework for consumer financial protection. Journal of Financial Economics, 105(2), 393–411.CrossRefGoogle Scholar
  35. Meyer, A., Spunt, B., & Frederick, S. (2013). The bat and ball problem. New York: Mimeo.CrossRefGoogle Scholar
  36. Moore, D. A., & Cain, D. (2007). Overconfidence and underconfidence: When and why people underestimate (and overestimate) the competition. Organizational Behavior and Human Decision Processes, 103(2), 197–213.CrossRefGoogle Scholar
  37. Nagel, R. (1995). Unraveling in guessing games: An experimental study. American Economic Review, 85(5), 1313–1326.Google Scholar
  38. Oechssler, J., Roider, A., & Schmitz, P. W. (2009). Cognitive abilities and behavioral biases. Journal of Economic Behavior & Organization, 72(1), 147–152.CrossRefGoogle Scholar
  39. Strzalecki, T. (2014). Depth of reasoning and higher order beliefs. Journal of Economic Behavior & Organization, 108, 108–122.CrossRefGoogle Scholar
  40. Toplak, M. E., West, R. F., & Stanovich, K. E. (2011). The cognitive reflection test as a predictor of performance on heuristics-and-biases tasks. Memory and Cognition, 39(7), 1275–1289.CrossRefGoogle Scholar

Copyright information

© Economic Science Association 2015

Authors and Affiliations

  1. 1.WZB Berlin Social Science CenterBerlinGermany
  2. 2.University College LondonLondonUK

Personalised recommendations