by Yunkyu Sohn
Traditional game theory assumes that the level of recursive belief inference is infinite when people choose their strategy as a result of guessing the others’ strategies. For example, in Keynesian beauty contest where all participants are asked to pick a number between 0 and 100 and win if one is the closest to 2/3 of population average, Nash equilibrium predicts all players should chose 0 since recursive inference about others’ preference will decrease the value of your choice, and eventually reach the minimum possible value. However studies in behavioral economics have found that the degree of recursion is bounded to smaller values.
By running a 2 dimensional stag-hunt game, recent fMRI experimental study done by Yoshida et al. demonstrates that people vary their level of inference depending on their partner’s past strategic profiles. Imaging result shows that prefrontal cortex region is subdivided by its roles for encoding uncertainty of inference of partner’s strategy and inferring the degree of recursive inference.