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On the beliefs off the path: Equilibrium refinement due to quantal response and level-K

Lookup NU author(s): Professor Daniel ZizzoORCiD

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Abstract

The extensive form game we study has multiple perfect equilibria, but it has a unique limiting logit equilibrium (QRE) and a unique level-k prediction as k approaches infinity. The convergence paths of QRE and level-k are different, but they converge to the same limit point. We analyze whether subjects adapt beliefs when gaining experience, and if so whether they take the QRE or the level-k learning path. We estimate transitions between level-k and QRE belief rules using Markov-switching rule learning models. The analysis reveals that subjects take the level-k learning path and that they advance gradually, switching from level 1 to 2, from level 2 to equilibrium, and reverting to level 1 after observing opponents deviating from equilibrium. The steady state therefore contains a mixture of behavioral rules: levels 0, 1, 2, and equilibrium with weights of 2.9%, 16.6%, 37.9%, and 42.6%, respectively.

Publication metadata

Author(s): Breitmoser Y, Tan JHW, Zizzo DJ

Publication type: Article

Publication status: Published

Journal: Games and Economic Behavior

Year: 2014

Volume: 86

Pages: 102-125

Print publication date: 01/07/2014

Online publication date: 25/03/2014

Date deposited: 14/04/2016

ISSN (print): 0899-8256

ISSN (electronic): 1090-2473

Publisher: Academic Press

URL: http://dx.doi.org/10.1016/j.geb.2014.03.002

DOI: 10.1016/j.geb.2014.03.002

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