On the Beliefs Off the Path: Equilibrium Refinement Due to Quantal Response and Level-K

43 Pages Posted: 31 Mar 2010

See all articles by Yves Breitmoser

Yves Breitmoser

European University Viadrina Frankfurt (Oder) - Institute of Microeconomics

Jonathan H. W. Tan

Nottingham University Business School

Daniel John Zizzo

University of Queensland - School of Economics

Date Written: March 26, 2010

Abstract

This paper studies the relevance of equilibrium and nonequilibrium explanations of behavior, with respects to equilibrium refinement, as players gain experience. We investigate this experimentally using an incomplete information sequential move game with heterogeneous preferences and multiple perfect equilibria. Only the limit point of quantal response (the limiting logit equilibrium), and alternatively that of level-k reasoning (extensive form rationalizability), restricts beliefs off the equilibrium path. Both concepts converge to the same unique equilibrium, but the predictions differ prior to convergence. We show that with experience of repeated play in relatively constant environments, subjects approach equilibrium via the quantal response learning path. With experience spanning also across relatively novel environments, though, level-k reasoning tends to dominate.

Keywords: Incomplete information, equilibrium refinement, logit equilibrium, rationalizability

JEL Classification: C72, C91, D62

Suggested Citation

Breitmoser, Yves and Tan, Jonathan H. W. and Zizzo, Daniel John, On the Beliefs Off the Path: Equilibrium Refinement Due to Quantal Response and Level-K (March 26, 2010). Nottingham University Business School Research Paper No. 2010-07, Available at SSRN: https://ssrn.com/abstract=1578829 or http://dx.doi.org/10.2139/ssrn.1578829

Yves Breitmoser

European University Viadrina Frankfurt (Oder) - Institute of Microeconomics ( email )

Frankfurt-Oder 15230
Germany

Jonathan H. W. Tan (Contact Author)

Nottingham University Business School ( email )

Jubilee Campus
Wollaton Road
Nottingham, NG8 1BB
United Kingdom

Daniel John Zizzo

University of Queensland - School of Economics ( email )

St Lucia
Brisbane, Queensland 4072
Australia

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