Equilibrium Selection in Coordination Games: An Experimental Study of the Role of Higher Order Beliefs in Strategic Decisions

Abstract

The equilibrium selection in games with multiple equilibria, such as coordination games, depends on one player’s beliefs about the other player’s behavior; as such, the outcome of the game depends on the players’ expectations of one another’s behavior. This study assessed the extent to which players’ higher order beliefs influence the strategic choices they make during \(2\times 2\) coordination games. Using a quadratic scoring rule, the players’ higher order beliefs about the choices their opponent would make were directly elicited in a laboratory experiment. The players’ higher order beliefs were analyzed to ascertain the extent to which players’ depth of thinking influenced their strategic decisions. In addition, this study focused on the question of whether the players update their beliefs to build higher order beliefs. The findings of the study revealed that the average participant operated on four steps of strategic depth. Higher order beliefs follow different patterns. In most cases, these contrast Bayesian updating.