Working Paper: CEPR ID: DP16644
Authors: Cary Frydman; Salvatore Nunnari
Abstract: We experimentally study how cognitive noise affects behavior in coordination games. When players face small computational errors in valuation, equilibrium play becomes more predictable owing to the disappearance of multiple equilibria. Our experimental data provide novel evidence for this prediction: the frequency of coordination depends systematically on (i) public information and (ii) the distribution from which public information is drawn. We estimate that cognitive noise constitutes roughly half of the observed noise in strategic behavior. The errors that we model are distinct from those in previous behavioral game theory models and give rise to novel predictions that our data support.
Keywords: complexity; context-dependence; stochastic choice; cognitive imprecision
JEL Codes: C72; C92; D91; E71
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| cognitive noise (D80) | player's ability to compute the value of each action (C71) |
| cognitive noise (D80) | frequency of coordination (E61) |
| cognitive noise (D80) | sensitivity of choice to game payoffs (C72) |
| cognitive noise (D80) | unique equilibrium in coordination games (C72) |
| low volatility distribution (C46) | coordination (P11) |
| cognitive noise (D80) | structural and strategic uncertainty (D89) |