University of Southern California
webinar – 17:00
We propose and experimentally test a theory of strategic behavior in which players are cognitively imprecise and perceive the state of the world with noise. We focus on 2 × 2 regime change games. When players observe the state precisely and this is common knowledge, there are multiple equilibria. However, when players are cognitively imprecise, each player holds a slightly different perception of the state and this transforms the game into one of incomplete information. Relying on arguments from the global games literature, we show that small perceptual noise can select a unique equilibrium. When combined with a further assumption of efficient coding, this prediction delivers our main testable hypothesis: the amount of noise with which players implement the unique equilibrium strategy is increasing in the ex-ante volatility of the state of the world. We find strong empirical support for this prediction in a pre-registered experiment. For a given state, the distribution of observed actions depends systematically on the environment to which players’ perceptual systems have adapted. Our results suggest that the theory of global games can potentially be applied even in the presence of precise public information (e.g., market prices) because of players’ cognitive imprecision.