The Generalized Keynesian Beauty Contest Game in behavioral Micro- and Macroeconomics

Résumé

The first experiments on the Beauty Contest game with its best-reply function, "your choice has to be closest to 2/3 of the average," established a bounded rational theory on limited cognition (called level-k). It is about the reasoning of the reasoning of others, originally and famously expressed in Keynes' Beauty Contest metaphor. Since then, there have been many variations in the game parameters and exogenous variations as subject pools ranging from students to professionals. With these variations, one can show the sensitivity of behavior, especially due to the perception of naïve behavior, the reference point of the level-k model. Furthermore, a generalization of the original best-reply function has encompassed many economic two-person and aggregated games (best replying to some order statistics (as sum, average) of other players' behavior). Examples include the Rock-Paper-Scissors game, the first-order conditions of the Cournot model, the Neo-Keynesian model, price forecasting games, and the simplified general equilibrium model (a la Benhabib et al. 2015),. We will give an overview of this historical account and show some applications in the recent behavioral macroeconomic literature (see survey, Angeletos and Lian, 2022)