SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

Abstract: This paper studies the evolution of peoples' models of how other people think -- their theories of mind. First, this is formalized within the level-k model, which postulates a hierarchy of types, such that type k plays a k times iterated best response to the uniform distribution. It is found that, under plausible conditions, lower types co-exist with higher types. The results are extended to a model of learning, in which type k plays a k times iterated best response the average of past play. The results are also extended to the cognitive hierarchy model, and to the introduction of a type that plays a Nash equilibrium.

Keywords: Theory of Mind; Evolution; Learning; Level-k; Fictitious Play; Cognitive Hierarchy

JEL-codes: C73; D83

53 pages, First version: May 4, 2010. Revised: March 20, 2012. Earlier revisions: May 12, 2010, May 14, 2010, May 31, 2010, June 1, 2010, June 2, 2010, June 9, 2011, June 9, 2011, November 24, 2011, February 8, 2012.

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