Cognitive Hierarchy Theory

Mark Thoma posts an excerpt about "Cognitive Hierarchy Theory" from Making a game of economic theory, EurekAlert which quotes Prof. Colin Camerer that instead of:

... "Almost all the analysis, however, assumes people plan ahead and carefully figure out what others will do, which often results in mathematical claims that are highly unrealistic cognitively."

In reality, Camerer says, a key part of strategizing about what other people--or corporations, or countries--will do involves thinking about what they think you will do. "You can also think about what others think you think. . . . It can go on and on."

This multiple steps in thinking ahead is called cognitive hierarchy theory. Camerer goes on to explain that not all people follow the same number of steps:

"The cognitive hierarchy theory finds that people only do a few steps of this kind of iterated thinking," he explains. "Usually, it's just one step: I act as if others are unpredictable. But sometimes it's two steps: I act as if others think *I* am unpredictable. You can think of the number of steps a person takes as their strategic IQ. A higher strategic IQ means you are outthinking a lot of other people."

This theory is a percularity of the Capitalist system in which all individuals have to compete for limited resources. Those who are able to think further ahead will gain more. It is really a justification for elitism: those who think more are rewarded more.

In a Communist economy, the emphasis would be on co-operation and theories like this will no longer be needed.