Differences in cognitive sophistication and effort are at the root of behavioral heterogeneity in economics. To explain this heterogeneity, behavioral models assume that certain choices indicate higher cognitive effort. A fundamental problem with this approach is that observing a choice does not...

Behavioral heterogeneity arising from cognitive differences among economic agents plays a fundamental role in the economy. To explain this heterogeneity, models of iterative thinking assume that certain choices indicate higher cognitive effort. That is, choices are used to infer the cognitive...