Bounded Rationality in Social Dilemmas: Limits of Iterated Reasoning in Repeated Trust Games with Opportunities for Network Control

Abstract

In repeated Trust Games, control effects refer to opportunities for sanctioning current trustee behavior by placing or withholding trust in future interactions, either of the same trustor or another trustor who is informed. Iterated reasoning is required to recognize incentives for control, whereby the trustor needs take one more reasoning step than the trustee. We research whether limits in actors‟ iterated reasoning explain strength of control effects on trustor and trustee behavior. Higher iterated reasoning ability and thereby control effects are hypothesized with experience with repeated Trust Games, with reasoning steps in dominance-solvable games, and with cognitive empathy. Hypotheses are tested in an interactive experiment. Results confirm that trustor control effects partially increase with experience. No effects were found on trustee behavior. The lack of evidence for the two other hypothesized mechanisms places doubts upon whether iterated reasoning is the mechanism through which trustor control effects increase with experience.