Cognitive sophistication and deliberation times
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Cognitive sophistication and deliberation times Carlos Alós‑Ferrer1 · Johannes Buckenmaier1 Received: 8 October 2019 / Revised: 27 July 2020 / Accepted: 1 August 2020 © The Author(s) 2020
Abstract Differences in cognitive sophistication and effort are at the root of behavioral heterogeneity in economics. To explain this heterogeneity, behavioral models assume that certain choices indicate higher cognitive effort. A fundamental problem with this approach is that observing a choice does not reveal how the choice is made, and hence choice data is insufficient to establish the link between cognitive effort and behavior. We show that deliberation times provide an individually-measurable correlate of cognitive effort. We test a model of heterogeneous cognitive depth, incorporating stylized facts from the psychophysical literature, which makes predictions on the relation between choices, cognitive effort, incentives, and deliberation times. We confirm the predicted relations experimentally in different kinds of games. Keywords Heterogeneity · Iterative reasoning · Cognitive sophistication · Deliberation times · Depth of reasoning · Cognitive effort JEL Classification C72 · C91 · D80 · D91
1 Introduction Economic agents form different expectations and react differently even when confronted with the same information, leading to substantial behavioral heterogeneity, which in turn has long been recognized as a fundamental aspect of economic interactions (e.g., Haltiwanger and Waldman 1985; Kirman 1992; Blundell and Stoker 2005; Von Gaudecker et al. 2011). A key source of heterogeneity is the fact that cognitive capacities differ among individuals, as does the motivation to exert cognitive effort. This observation has given rise to a rich theoretical literature on iterative Electronic supplementary material The online version of this article (https://doi.org/10.1007/s1068 3-020-09672-w) contains supplementary material, which is available to authorized users. * Carlos Alós‑Ferrer carlos.alos‑[email protected] 1
Department of Economics, Zurich Center for Neuroeconomics (ZNE), University of Zurich, Blümlisalpstrasse 10, 8006 Zurich, Switzerland
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or stepwise reasoning processes, including level-k models (Stahl 1993; Nagel 1995; Stahl and Wilson 1995; Ho et al. 1998) and models of cognitive hierarchies (Camerer et al. 2004). Such models endow individuals with differing degrees of strategic sophistication or reasoning capabilities, and might hold the key to describe heterogeneity in observed behavior (for a recent survey, see Crawford et al. 2013). In particular, they have proven invaluable to explain behavioral puzzles as overbidding in auctions (Crawford and Iriberri 2007), overcommunication in sender-receiver games (Cai and Wang 2006), coordination in market-entry games (Camerer et al. 2004), and why communication sometimes improves coordination and sometimes hampers it (Ellingsen and Östling 2010). More recently, a small but growing literature in macro
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