Title: Laboratory Experiments on Belief Formation and Cognitive Constraints
Description: In this dissertation I study how different cognitive constraints affect individuals' belief formation process, and the consequences of these constraints on behavior. In the first chapter I present laboratory experiments designed to test whether subjects' inability to perform more rounds of iterated deletion of dominated strategies is due to cognitive limitations, or to higher order beliefs about the rationality of others. I propose three alternative explanations for why subjects might not be doing more iterations of dominance reasoning. First, they might have problems computing iterated best responses, even when doing so does not require higher order beliefs. Second, subjects might face limitations in their ability to generate higher order beliefs. Finally, subjects' behavior might not be limited by cognitive limitations, but rather justified by their beliefs about what others will play. I design two experiments in order to test these hypothesis. Findings from the first experiment suggest that most subjects' strategies (about 66%) are not the result of their inability to compute iterated best responses.

I then run a second experiment, finding that about 70% of the subjects' behavior come from limitations in their ability to iterate best responses and generate higher order beliefs at the same time, while for the other 30% their strategies are a best response to higher order beliefs that others are not rational. In the second chapter I study whether a Sender in a Bayesian Persuasion setting (Kamenica and Gentzkow, 2011) can benefit from behavioral biases in the way Receivers update their beliefs, by choosing how to communicate information. I present three experiments in order to test this hypothesis, finding that Receivers tend to overestimate the probability of a state of the world after receiving signals that are more likely in that state. Because of this bias, Senders' gains from persuasion can be increased by ``muddling the water'' and making it hard for Receivers to find the correct posteriors. This contradicts the theoretical result that states that communicating using signal structures is equivalent to communicating which posteriors these structures induce.

Through analysis of the data and robustness experiments, I am able to discard social preferences or low incentives as driving my results, leaving base-rate neglect as a more likely explanation. The final chapter studies whether sensory bottlenecks, as oppose to purely computational cognitive constraints, are important factors affecting subjects' inference in an experiment that mimics financial markets. We show that providing redundant visual and auditory cues about the liquidity of a stock significantly improves performance, corroborating previous findings in neuroscience of multi-sensory integration, which could have policy implications in economically relevant situation.