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I think the below does a good job consicely defining "Levels" in poker.

In poker terms this is known as "levels of thinking".
Level 1 - Playing your cards.
Level 2 - Trying to read your opponents hand.
Level 3 - Trying to figure out what your opponent thinks you have.
Level 4 - Trying to figure out what your opponent thinks you think, he has.
If your opponent is simply playing his cards, it does you no good to try to figure out what he thinks you have; he has no clue what you have, and doesn't even care! The correct way to play against this player is to think in terms of level 2, what does he have?