A reading of the literature on cognitive hierarchies leaves the impression that a subject’s type is predetermined before she comes into the lab so that the distribution of types is exogenous and immutable across games. In this chapter we view the choice of a person’s cognitive level as endogenous and explain it by focusing on subject’s ’expectations about the cognitive levels endogenously chosen by others. We run a set of experiments using the two-thirds guessing game where subjects receive public advice offered by a set of advisors. We discover that certain types of public advice, those that are commonly interpreted as meaningful, are capable of shifting the distribution of observed cognitive types, indicating that the distribution is endogenous.

This chapter asks and attempts to answer a set of questions we have not dealt with previously. More precisely, in all of our previous chapters (except for Chapter 9 on social learning), people had no choice as to what information they received before they made a decision. They just received advice. We now ask whether there are other types of information they might prefer. We have also never asked whether people have preferences over who gives them advice. Are there types of people that are perceived as good advisors and other types that are perceived as unreliable? If so, who are those “good advisors” and what characteristics do they share? The ... first question is important because it asks how important advice is to decision makers. If people consider advice only when they have no other source of information, then its influence will be diminished when they are given access to alternatives. However, if advice has an inordinate sway over people, if they seek it out, then we need to understand why advice is so desirable or persuasive. The second question is also important because, if certain types of people are considered good advisors, then this perception may confer rents on them which may or may not be warranted. To answer these questions, we set up a market for advice and advisors. In general, we find that subjects bid significantly more for data than they do for advice, i.e., they prefer information that they can use to make their own decision rather than having an advisor offer them advice. We also ... find some evidence for “perception rents” for economics majors, whose price is elevated in the market, and a certain amount of support for what we call the ”chauvinistic bias,” meaning that subjects tended to bid more for advice from people sharing the same major as themselves than for people of other majors.

While the mechanisms that economists design are typically static, one-shot games, in the real world, mechanisms are used repeatedly by generations of agents who engage in them for a short period of time and then pass on advice to their successors. Hence, behavior evolves via social learning and may diverge dramatically from that envisioned by the designer. We demonstrate that this is true of school matching mechanisms – even those for which truth-telling is a dominant strategy. Our results indicate that experience with an incentive-compatible mechanism may not foster truthful revelation if that experience is achieved via social learning.

Since advice is central to what we are discussing here, it might be worthwhile to spend some time simply thinking about what advice is, what are the different types of advice we might come upon in our daily lives, and how advice is treated by different academic disciplines. That is what we do here. We ... first define what advice is, then categorize advice into some common-sense categories without expecting our categories to be either exhaustive or mutually exclusive. Finally, we discuss the way advice is treated in the economics and psychology literature, and contrast their approaches to the topic. In our next chapter, we turn our attention to conventions of behavior and the intergenerational games determining them.

When new generations arrive in the world, they look around and many times remark about what a lousy job their predecessors (parents) have done. The world we leave our children we hope is better than the one we inherited, but that is many times not the case. The question then arises of how, after we have made a mess of things, we can rectify the situation. The answer is to teach our children to do better. Leave them advice that basically says “don’t do as we did, but do as we say or advise you to do”. This chapter investigates how easy this is to do. The central question is how to break out of unsatisfactory equilibria when they occur. What we find is that intergenerational advice can be beneficial in such situations but only if the advice offered is common knowledge. More precisely, it is hard to act in a risky strategic situation (like the one we place our subjects in) if you know that your opponents have been given advice as to what to do but you do not know what that advice is. In such situations, if a safe action exists, it is probably best to choose it unless you are sure that everyone else has been instructed to act responsibly and you expect them to follow that advice. It is at this juncture that common knowledge of advice matters and this is what we investigate in this chapter.

Coordination is a central feature of economic life. If we do not coordinate our activities, we are destined to waste our time and effort. However, often the way we coordinate has distributional consequences – some people receive more benefits than others. Such situations establish what Ullman Margalit (1977) call “norms of partiality” where the convention created to solve a problem bestows privileges on one set of people. If you are on the short end of the convention, you may be upset. We investigate the creation and evolution of conventions of behavior in these situations using our “intergenerational games” framework or games in which a sequence of non-overlapping “generations” of players play a stage game for a finite number of periods and are then replaced by other agents, who continue the game in their role for an identical length of time. Players in generation t can offer advice to their successors in generation t + 1. What we find is that word-of-mouth social learning (in the form of advice from laboratory “parents” to laboratory “children”) can be a strong force in the creation of social conventions.

Consider a worker with a nosy boss who continually offers suggestions and advice. Such a meddlesome supervisor creates a problem for the worker, since he or she may not want to insult the supervisor by ignoring his advice, his or her raise may depend on pleasing him, yet he or she may know that such advice is foolish and would only decrease firm profits if followed. The question we ask in this chapter is, does such a meddlesome relationship between worker and boss interfere with the learning abilities of the worker? We find the answer is a resounding no. In fact, subjects in our laboratory experiment who have what we have called meddlesome bosses advising them actually learn better than those with bosses whose advice can be ignored and fare much better than those subjects with no laboratory bosses at all.

In recent years there has been a great deal of interest in designing matching mechanisms that can be used to match public school students to schools (the student matching problem). The premise of this chapter is that, when testing mechanisms, we must do so in the environment in which they are used in the real world rather than in the environment envisioned by theory. More precisely, in theory, the school matching problem is a static one-shot game played by parents of children seeking places in a finite number of schools and played non-cooperatively without any form of communication or commitment between parents. However, in the real world, the school choice program is played out in a different manner. Typically, parents choose their strategies after consulting with other parents in their social networks and exchanging advice on both the quality of schools and the proper way they should play the “school matching game”. The question we ask here is whether chat between parents affects the strategies they choose, and if so, whether it does so in a welfare-increasing or welfare-decreasing manner. We find that advice received by chatting has proven to have a very powerful influence on decision makers, in the sense that advice tends not only to be followed but typically has a welfare-increasing consequence.

In the real world, when people play games, they often receive advice from those that have played it before them. Such advice can facilitate the creation of a convention of behavior. This chapter studies the impact of advice on the behavior of subjects who engage in a non-overlapping generational ultimatum game where, after a subject plays, she is replaced by another subject to whom she can offer advice. Our results document the fact that allowing advice fosters the creation of a convention of behavior in ultimatum games. In addition, by reading the advice offered, we conclude that arguments of fairness are rarely used to justify the offers of senders but are relied upon to justify rejections by receivers.

Social learning describes any situation in which individuals learn by observing the behavior of others. In the real world, however, individuals learn not just by observing the actions of others, but also learn from advice. This chapter introduces advice giving into the standard social learning experiment of Çelen and Kariv (2005). The experiments are designed so that both pieces of information action and advice are equally informative (in fact, identical) in equilibrium. Despite the informational equivalence of advice and actions, we ... find that subjects in a laboratory social-learning situation appear to be more willing to follow the advice given to them by their predecessor than to copy their action, and that the presence of advice increases subjects’ ’welfare.