Advertisement

A Note on the Institution as a Nested Reasoning Structure in Terms of Bounded Cognition

Note
  • 24 Downloads

Abstract

The present note discusses a new view of the institution as a nested structure of reciprocal reasoning. To explain the emergence of a Nash equilibrium, Aumann assumed common knowledge of the conjectures of agents with respect to strategy spaces. In the present note, we demonstrate that common knowledge can be defined by knowledge and infinite reasoning. However, recent studies in experimental economics, suggest that the assumption of infinite reciprocal reasoning is, in most cases, neither empirically relevant nor necessary for achieving a Nash equilibrium. Moreover, we demonstrate that reasonable states, which are composed of non-Nash equilibrium strategies, are attained only by bounded reasoning agents. Furthermore, this view of the institution is applied to examples such as Bentham’s Panopticon and the depth of reasoning in the institution is examined.

Keywords

institution finite nest of reciprocal reasoning mutual knowledge belief system 

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Aoki, M. (2001) Toward a Comparative Institutional Analysis (Comparative Institutional Analysis, 2), MIT Press.Google Scholar
  2. - (2007) “Endogenizing institutions and institutional changes,” Journal of Institutional Economics 3.1: 1–31.Google Scholar
  3. Aumann R. J. (1992) “Irrationality in game theory,” Economic Analysis of Markets and Games, MIT Press.Google Scholar
  4. - (1997) “Rationality and Bounded Rationality,” Games and Economic Behavior 21: 2–14.Google Scholar
  5. - and A. Brandenburger (1995) “Epsmetic condition for Nash equilibrium,” Econometrica 63.5: 1161–1180.Google Scholar
  6. Bentham, J. and J. Bowring, (1838) Works of Jeremy Bentham, Edinburgh, W. Tait.Google Scholar
  7. Camerer, C. F., T.-H. Ho and J.-K. Chong (2004) “A Cognitive Hierarchy Model of Games,” Quartely Journal of Economics 119.3: 861–898.CrossRefGoogle Scholar
  8. Chwe, M. S.-Y. (2003) Rational Ritual: Culture, Coordination, and Common Knowledge, Princeton University Press.Google Scholar
  9. Costa-Gomes, M., V. P. Crawford and B. Broseta (2001) “Cognition and Behavior in Normal-Form Games: An Experimental Study,” Econometrica 69.5: 1193–1235.CrossRefGoogle Scholar
  10. Gabaix, X. and D. Laibson (2000) “A Boundedly Rational Decision Algorithm,” The American Economic Review 90.2: 433–438.CrossRefGoogle Scholar
  11. Masumoto, G. (2000) The Lambda Game System: an approach to a meta-game (Feasibility of Theoretical Arguments of Mathematical Analysis on Computer). [http://www.hdl.handle.net/2433/25677]
  12. Haruvy, E. and D. O. Stahl (2004) “Deductive versus inductive equilibrium selection: experimental results,” Journal of Economic Behavior & Organization 53: 319–331.CrossRefGoogle Scholar
  13. - (2007) “Equilibrium selection and bounded rationality in symmetric normal-form games,” Journal of Economic Behavior & Organization 62: 98–119.CrossRefGoogle Scholar
  14. Ho, T. H., C. Camerer and K. Weigelt (1998) “Iterated Dominance and Iterated Best Response in Experimental “p-Beauty Contests”,” The American Economic Review 88.4: 947–969.Google Scholar
  15. Fischbachera, U., S. Gachter and E. Fehr (2001) “Are people conditionally cooperative? Evidence from a public goods experiment,” Economics Letters 71: 397–404.CrossRefGoogle Scholar
  16. Nagel, R. (1995) “Unraveling in Guessing Games: An Experimental Study,” The American Economic Review 85.5: 1313–1326.Google Scholar
  17. Spiro, P. F. (2000) “The New Sovereigntists—American Exceptionalism and Its False Prophets-”, Forein Affairs, November/December.Google Scholar
  18. Stahl, D. O. (1998) “Is step-j thinking an arbitrary modelling restriction or a fact of human nature?,” Journal of Economic Behavior & Organization 37: 33–51.CrossRefGoogle Scholar
  19. - and E. Haruvy “Level-n bounded rationality in two-player two-stage games,” Journal of Economic Behavior & Organization (in press).CrossRefGoogle Scholar
  20. - and - “Level-n bounded rationality and dominated strategies in normal-form games,” Journal of Economic Behavior & Organization (in press).Google Scholar
  21. Kawamura, T., G. Masumoto and Y. Kobayashi Possibility of evolution about reasoning abirity in complex game, mimeo (forthcoming).Google Scholar
  22. Victor, D. G. (2001) The Collapse of the Kyoto Protocol and the Struggle to Slow Global Warming, Princeton University Press.Google Scholar
  23. Shinada, M. and T. Yamagishi (2007) “Punishing free riders: direct and indirect promotion of cooperation,” Evolution and Human Behavior 28.5: 330–339.CrossRefGoogle Scholar

Copyright information

© Japan Association for Evolutionary Economics 2009

Authors and Affiliations

  1. 1.JSPS Research FellowJapan

Personalised recommendations