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Download the Paper (221 K, PDF file) - September 1, 2003 Tell a colleague about it. Printing Tips: Select 'print as image' in the Acrobat print dialog if you have trouble printing.

ABSTRACT:
In repeated games with Nash equilibria in mixed strategies, players optimize by playing randomly. Players are boundedly rational in their randomization eorts. Arguably, they have no internal randomization facility and they fashion external randomization aids from the environment. By conditioning on past play, boundedly rational players exhibit a pattern. The pattern is characterized by cognitive limitations variously called local representativeness, the law of small numbers or the gambler’s fallacy. I find one such pattern—balance then runs—in re-analysis of existing data for matching pennies experiments. While players and play are heterogeneous, the pattern makes prediction plausible. I implement prediction with a non-linear autoregression. Model 1 is a statistically and substantively significant tool for predicting behavior in matching pennies. There is evidence for two other behavioral models, both of which require some sort of sophistication—including a model of the opponent as boundedly rational.

SUGGESTED CITATION:
Steven Scroggin, "Bounded Rationality in Randomization" (September 1, 2003). Department of Economics, UCSD. Paper 2003-13.
http://repositories.cdlib.org/ucsdecon/2003-13