Abstract:
Rationality and common belief of rationality (RCBR) is a standard benchmark in game theory. Yet, a body of experimental research points to departures from RCBR. These RCBR departures are typically viewed as an artifact of limits in the ability to engage in interactive reasoning, i.e., to reason through sentences of the form “I think, you think, I think, etc ...” We develop a conceptual and practicable framework to test the hypothesis that departures from RCBR are determined by limits in interactive reasoning. The identification strategy benefits from not relying on auxiliary measures of “ability” or “sophistication” that can capture concepts distinct from limited ability to engage in interactive reasoning. We conduct an experiment based on this identification strategy and show that at least 60% of subjects have RCBR departures that are not an artifact of limited ability to engage in interactive reasoning. Moreover, the experiment provides insight into how players’ reason when they depart from RCBR. It suggests that players’ reasoning depends on certain natural heuristics.
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