Discussion Paper
No. 2019-53 | 2019.11.06
Felix Mauersberger, Rosemarie Nagel and Christoph Bühren
Bounded rationality in Keynesian beauty contests: a lesson for central bankers?
(Published in Bio-psycho-social foundations of macroeconomics)


The goal of this paper is to show how adding behavioral components to micro-foundated models of macroeconomics may contribute to a better understanding of real world phenomena. The authors introduce the reader to variations of the Keynesian Beauty Contest (Keynes, The General Theory of Employment, Interest, and Money, 1936), theoretically and experimentally with a descriptive model of behavior. They bridge the discrepancies of (benchmark) solution concepts and bounded rationality through step-level reasoning, the so-called level-k or cognitive hierarchy models. These models have been recently used as building blocks for new behavioral macro theories to understand puzzles like the lacking rise of inflation after the financial crisis, the effectiveness of quantitative easing, the forward guidance puzzle and the effectiveness of temporary fiscal expansion.

JEL Classification:

E12, E13, E7, D80, D9, C91

Cite As

[Please cite the corresponding journal article] Felix Mauersberger, Rosemarie Nagel, and Christoph Bühren (2019). Bounded rationality in Keynesian beauty contests: a lesson for central bankers? Economics Discussion Papers, No 2019-53, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2019-53

Comments and Questions

Anonymous - Referee report 1
December 04, 2019 - 08:27
see attached file

Anonymous - Referee report 2
December 10, 2019 - 13:26
This is a very nice review of beauty contest games and their application to New Keyenesian models, but two leading experts in the field. I only have one very minor point. Figure 4, referring to the Heemeijer et al. (2009) experiments has no description/reference in the text, or at least, I could not find one. So that should be added somewhere.

Anonymous - Referee report 3
January 03, 2020 - 10:23
The paper is a nice review of k-level thinking and its applications to macroeconomics. It reviews all relevant advances in the experimental literature since the seminal work of Nagel (1995) and discusses recent application to macroeconomics. In the remainder I have a few smaller comments: (1) For macroeconomists, given the recent advances with k-level thinking, the description of out-of-equilibrium behavior in the introduction may be misunderstood (one could claim that in a repeated interaction environment level k is at least a temporary equilibrium if not an equilibrium). What I'm asking for is just to define an environment in which this is an out of equilibrium behavior, so there is no confusion. (2) Perhaps you can briefly review also Angeletos and Huo (2019) paper (Myopia and Anchoring) in Section 5. (3) Perhaps you could omit some repetitions. For example, first paragraph of section 4.2.3 is a repetition of what was explained in the second paragraph on page 10. (4) a few small typos:- page 3: punctuation after the footnote call should be moved to the footnote (where parentheses have to be adjusted as well)-page 13, third paragraph: replace "there" with "their."-page 17: last sentence of paragraph3 is missing something, perhaps "be."-page 18: spacing before call for footnote 5.

Anonymous - Referee report 4
January 03, 2020 - 10:26
see attached file

Felix Mauersberger, Rosemarie Nagel, and Christoph Bühren - Reply to referee reports
April 17, 2020 - 13:25
see attached file