Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/192901
Year of Publication: 
2018
Series/Report no.: 
Working Paper No. 292
Publisher: 
University of Zurich, Department of Economics, Zurich
Abstract: 
Behavioral heterogeneity arising from cognitive differences among economic agents plays a fundamental role in the economy. To explain this heterogeneity, models of iterative thinking assume that certain choices indicate higher cognitive effort. That is, choices are used to infer the cognitive process behind the choices themselves. To establish this link choice data is insufficient, thus an individually-measurable correlate of cognitive effort is required. We argue that deliberation times provide this missing link. We present a simple 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. In an experimental test, the predicted relations are readily observed in the data, but only when the features leading to iterative thinking are salient enough. Hence, the predicted relations become a tool to uncover the limits of models of iterative thinking.
Subjects: 
Heterogeneity
level-k reasoning
cognitive sophistication
deliberation times
depth of reasoning
cognitive effort
JEL: 
C72
C91
D80
D91
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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