On the beliefs off the path: equilibrium refinement due to quantal response and level-k

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