Quantal Response Equilibrium with Symmetry: Representation and Applications

Abstract

Quantal Response Equilibrium (QRE) generalizes Nash equilibrium (NE) by allowing players to make probabilistic mistakes in best responding to others' behavior while maintaining fixed-point consistency. QRE has had considerable success in explaining empirically observed deviations from NE ([3]) and so has become a standard benchmark for analyzing experimental data. QRE is nothing more than equilibrium with noisy players, and the only modelling consideration is how to model this noise: one must select the admissable family of noise structures. The literature has proposed a number of such families, ranging from the very precise to the very flexible. At one extreme, noise is governed by a specific parametric family, whereas on the other, there are so many degrees of freedom that the model is difficult to reject.