The neuroeconomics of strategic interaction

We describe here the theoretical, behavioral and neural bases of strategic interaction — multiagent situations where the outcome of one's choice depends on the actions of others. Predicting others’ actions requires strategic thinking, thus thinking about what the others might think and believe. Game theory provides a canonical model of strategic thinking implicit in the notion of equilibrium and common knowledge of rationality. Behavioral evidence shows departures from equilibrium play and suggests different models of strategic thinking based on bounded rationality. We report neural evidence in support of non-equilibrium models of strategic thinking. These models suggest a cognitive-hierarchy theory of brain and behavior, according to which people use different levels of strategic thinking that are associated with specific neural computations.