Bounded Rationality and Strategic Uncertainty in a Simple Dominance Solvable Game.

Summary How much of the failures to achieve Pareto efficient outcome observed in a simple 2 2 dominance solvable game can be attributed to strategic uncertainty and how much is actually due to individual bounded rationality? We address this question by conducting a set of experiments involving two main treatments: one in which two human subjects interact, and another in which one human subject interacts with a computer program whose behavior is known. By making the behavior of the computer opponent perfectly predictable, the latter treatment eliminates strategic uncertainty. Our results suggest that observed coordination failures can be attributed equally to individual bounded rationality and strategic uncertainty.