Reasoning about Bounded Reasoning

Abstract

In experimental applications of bounded-reasoning models, behavior is often summarized by distributions of "levels". We argue that such summaries conflate two conceptually distinct dimensions: a player's type, capturing beliefs about what types their opponents might be, and the depth of higher-order reasoning about rationality. Distinguishing these dimensions matters for interpreting experimental evidence and for understanding when cross-environment variation should be read as changes in beliefs versus changes in cognitive depth, but existing frameworks provide no language to do so. We develop a unified framework by "lifting" static complete-information games into incomplete-information versions in which players are explicitly uncertain about opponents' types. Within this framework, bounded reasoning about opponents' types is represented by transparent first-order belief restrictions, while (higher-order) reasoning depth is captured by bounds on belief in rationality. We analyze three benchmark instances: downward rationalizability, a robust baseline, and two refinements, $\mathsf{L}$-rationalizability and $\mathsf{C}$-rationalizability, which provide epistemic foundations -- with an important nuance -- for classic level-$k$ and Cognitive Hierarchy, respectively, and clarify what "level-$k$" behavior can and cannot reveal about underlying reasoning processes.