Bridging Level-K to Nash Equilibrium

Abstract

We propose a new solution concept, NLK, that connects Nash Equilibrium (NE) and Level-K. It allows a player in a game to believe that her opponent may be either less or as sophisticated as, she is a view with support in psychology. We apply it to data from four published papers on static, dynamic and auction games. NLK provides different predictions than those of NE and Level-K. Moreover, a simple version of it explains the experimental data better in many cases. We discuss extensions to games with more than two players and heterogeneous beliefs.