Rationality and Consistent Beliefs: Theory and Experimental Evidence

This is an investigation into the behavioral and experimental support for different epistemic conditions that together imply that players are to play according to Nash equilibrium. It employs strategic choice data from a carefully chosen set of ring-network games to obtain individual-level estimates of the following three epistemic conditions: rationality; beliefs about the rationality of others; and consistent beliefs about strategies. We find that 94 percent of subjects are rational, 72 percent of subjects are rational and believe others are rational, and 44 percent of subject are rational and hold at least second-order beliefs about the rationality of others. Of the 72 percent of subjects that satisfy the sufficient rationality conditions for Nash equilibrium, none of them satisfy consistent beliefs. Not a single subject satisfies all three of the sufficient epistemic conditions for Nash equilibrium. The unique design allows us to weigh the relative plausibility of alternatives to Nash equilibrium used to account for laboratory results. The data tend to support the level-k model.