Self-selection with non-equilibrium beliefs: Predicting behavior in a tournament experiment

Abstract

In this study we use level-k thinking and a recently proposed model of non-equilibrium beliefs in dynamic games (PBNLK) to predict behavior in a tournament with self-selection. We find that the combination of level-k and PBNLK predicts both the population of types in the tournament, as well as the mean and variance of efforts better than Nash equilibrium, a static level-k model and other models of non-equilibrium beliefs. Our results show that non-equilibrium beliefs are an important determinant for the decision to compete in a tournament and the performance in that tournament. Moreover, a useful model of non-equilibrium beliefs should allow players to update their beliefs during the course of the competition.