Quantal response equilibrium (QRE) is a solution concept in game theory. First introduced by Richard McKelvey and Thomas Palfrey,^[1][2] it provides an equilibrium notion with bounded rationality. QRE is not an equilibrium refinement, and it can give significantly different results from Nash equilibrium. QRE is only defined for games with discrete strategies, although there are continuous-strategy analogues.

In a quantal response equilibrium, players are assumed to make errors in choosing which pure strategy to play. The probability of any particular strategy being chosen is positively related to the payoff from that strategy. In other words, very costly errors are unlikely.

The equilibrium arises from the realization of beliefs. A player's payoffs are computed based on beliefs about other players' probability distribution over strategies. In equilibrium, a player's beliefs are correct.

Application to data

When analyzing data from the play of actual games, particularly from laboratory experiments, particularly from experiments with the matching pennies game, Nash equilibrium can be unforgiving. Any non-equilibrium move can appear equally "wrong", but realistically should not be used to reject a theory. QRE allows every strategy to be played with non-zero probability, and so any data is possible (though not necessarily reasonable).

Logit equilibrium

The most common specification for QRE is logit equilibrium (LQRE). In a logit equilibrium, player's strategies are chosen according to the probability distribution:

${\displaystyle P_{ij}={\frac {\exp(\lambda EU_{ij}(P_{-i}))}{\sum _{k}{\exp(\lambda EU_{ik}(P_{-i}))}}}}$

${\displaystyle P_{ij}}$ is the probability of player ${\displaystyle i}$ choosing strategy ${\displaystyle j}$. ${\displaystyle EU_{ij}(P_{-i})}$ is the expected utility to player ${\displaystyle i}$ of choosing strategy ${\displaystyle j}$ under the belief that other players are playing according to the probability distribution ${\displaystyle P_{-i}}$. Note that the "belief" density in the expected payoff on the right side must match the choice density on the left side. Thus computing expectations of observable quantities such as payoff, demand, output, etc., requires finding fixed points as in mean field theory.^[3]

Of particular interest in the logit model is the non-negative parameter λ (sometimes written as 1/μ). λ can be thought of as the rationality parameter. As λ→0, players become "completely non-rational", and play each strategy with equal probability. As λ→∞, players become "perfectly rational", and play approaches a Nash equilibrium.^[4] In a non-mean-field variant of QRE, the Gibbs measure is the resulting form of the equilibrium measure, and this parameter λ is in fact the inverse of the temperature of the system which quantifies the degree of random noise in decisions.^[5]

For dynamic games

For dynamic (extensive form) games, McKelvey and Palfrey defined agent quantal response equilibrium (AQRE). AQRE is somewhat analogous to subgame perfection. In an AQRE, each player plays with some error as in QRE. At a given decision node, the player determines the expected payoff of each action by treating their future self as an independent player with a known probability distribution over actions. As in QRE, in an AQRE every strategy is used with nonzero probability.

Applications

The quantal response equilibrium approach has been applied in various settings. For example, Goeree et al. (2002) study overbidding in private-value auctions,^[6] Yi (2005) explores behavior in ultimatum games,^[7] Hoppe and Schmitz (2013) study the role of social preferences in principal-agent problems,^[8] and Kawagoe et al. (2018) investigate step-level public goods games with binary decisions.^[9]

Most tests of quantal response equilibrium are based on experiments, in which participants are not or only to a small extent incentivized to perform the task well. However, quantal response equilibrium has also been found to explain behavior in high-stakes environments. A large-scale analysis of the American television game show The Price Is Right, for example, shows that contestants behavior in the so-called Showcase Showdown, a sequential game of perfect information, can be well explained by an agent quantal response equilibrium (AQRE) model.^[10]

Critiques

See also

• Bounded rationality
• Behavioral game theory

References