Cognitive Capacity and Cognitive Hierarchy: A Study Based on Beauty Contest Experiments

Abstract

Recent developments in behavioral experiments, in particular game experiments, have placed human cognition in a pivotal place. Two related ideas are proposed and are popularly used in the literature, namely, cognitive hierarchy and cognitive capacity. While these two often meet in the same set of experiments and observations, few studies have formally addressed their relationship. In this study, based on six series of 15- to 20-person beauty contest experiments and the associated working memory tests, we examine the effect of cognitive capacity on the observed cognitive hierarchy. It is found that cognitive capacity has a positive effect on the observed cognitive hierarchy. This effect is strong in the initial rounds, and may become weaker, but without disappearing, in subsequent rounds, which suggests the possibility that cognitive capacity may further impact learning. We examine this possibility using the Markov transition dynamics of cognitive hierarchy. There is evidence to show that subjects with different cognitive capacities may learn differently, which may cause strong convergence to be difficult to observe.