Bounded Reasoning: Rationality or Cognition

Limited reasoning about rationality is well understood to lead to important behavioral consequences. The literature has typically viewed such limited reasoning as an artifact of cognitive bounds|loosely, an inability to reason about how the other player reasons, etc. However, in principle, subjects may not be willing to believe their opponent is \rational, believes rationality, etc. . . " even if the subject is capable of reasoning in this way. In this paper, we allow for the possibility that a subject’s rationality bound may be lower than her cognitive bound: so two subjects with the same cognitive bound may have dierent rationality bounds. We develop an identication strategy that allows us to disentangle the cognitive bound from the rationality bound and to investigate the extent to which bounds on rationality are driven by bounds on cognition. Using the experimental data from Kneeland (2015), we show that rationality bounds are tighter than cognitive bounds. Rationality bounds are an important determinant of behavior, especially for subjects with high cognitive bound.