Level-n bounded rationality in two-player two-stage games

We extend the Level-n theory of bounded rationality from the domain of symmetric normal-form games to the domain of simple two-player, two-stage extensive-form games. We designed and conducted experiments to test pertinent hypotheses. The extended Level-n model fits the data remarkably well and significantly better than subgame perfect equilibrium theory. Moreover, we find that the vast majority of behavior appears individualistic. Further, we characterize the non-individualistic behavior as stemming from a combination of utilitarian and Fehr-Schmidt other-regarding preferences.