Coordination and Sophistication

• Authors: Katharina A. Janezic, Antonio Penta and Larbi Alaoui.
• BSE Working Paper: 1372 | November 22
• Keywords: Coordination , cognitive cost , sophistication , strategic reasoning , value of reasoning
• JEL codes: C72, C91, C92, D80, D91

How coordination can be achieved in isolated, one-shot interactions without communication and in the absence of focal points is a long-standing question in game theory. We show that a cost-benefit approach to reasoning in strategic settings delivers sharp theoretical predictions that address this central question. In particular, our model predicts that, for a large class of individual reasoning processes, coordination in some canonical games is more likely to arise when players perceive heterogeneity in their cognitive abilities, rather than homogeneity. In addition, and perhaps contrary to common perception, it is not necessarily the case that being of higher cognitive sophistication is beneficial to the agent: in a variation of the Battle of the Sexes that we construct, for instance, the strategic advantage is reversed. We show that subjects’ behavior in a laboratory experiment is consistent with the predictions of our model, and present evidence against alternative coordination mechanisms.