Exploration vs Exploitation, Impulse Balance Equilibrium, and a Specification Test for the El Farol Bar Problem

The paper reports on market-entry experiments that manipulate both payoff structures and payoff levels to assess two stationary models of behaviour: Exploration vs Exploitation (EvE, which is equivalent to Quantal Response Equilibrium) and Impulse Balance Equilibrium (IBE). These models explain the data equally well in terms of goodness-of-fit whenever the observed probability of entry is less than the symmetric Nash equilibrium prediction; otherwise IBE marginally outperforms EvE. When assuming agents playing symmetric strategies, and estimating the models with session data, IBE yields more theory-consistent estimates than EvE, no matter the payoff structure or level. However, the opposite occurs when the symmetry assumption is relaxed. The conduct of a specification test rejects the validity of the restrictions on entry probabilities imposed by EvE for agents with symmetric strategies, in 50 to 75% of sessions and it always rejects it in the case of IBE, which indicates that the symmetric variant of these models has little empirical support.

Kirman, Alan, François Laisney and Paul Pezanis-Christou (2018), Exploration vs Exploitation, Impulse Balance Equilibrium, and a Specification Test for the El Farol Bar Problem, ZEW Discussion Paper No. 18-038, Mannheim.