Behavioral game theory
Behavioral game theory
- Behavioral game theory** seeks to examine how people's strategic decision-making behavior is shaped by social preferences, social utility and other psychological factors. Behavioral game theory analyzes interactive [[strategy-(game-theory)|strategic]] decisions and behavior using the methods of [[game-theory]], experimental economics, and experimental psychology. Experiments include testing deviations from typical simplifications of economic theory such as the independence axiom and neglect of altruism, [[fair-division|fairness]], and framing effects.
Traditional game theory is a critical principle of economic theory, and assumes that people's strategic decisions are shaped by rationality, selfishness and utility maximisation.
Behavioral game theory largely utilizes empirical and theoretical research to understand human behavior.
History Behavioral game theory began with the work of Allais in 1953 and Ellsberg in 1961. They discovered the Allais paradox and the Ellsberg paradox, respectively. Both paradoxes show that choices made by participants in a game do not reflect the benefit they expect to receive from making those choices. In 1956, the work of Vernon Smith showed that economic markets could be examined experimentally rather than only theoretically, and reinforced the importance of rationality and self-interest within economic models. According to rational choice theory, consumers' behavior depends on three reasons. The first reason is that the degree of emotional pleasure consumers derive from their purchases depends on their preferences. The second reason is that consumers do not have enough choices. The third reason is that consumers derive greater pleasure from a limited number of choices. Common resource games were used to experimentally test how cooperation and social desirability affect subject's choices. A real-life example of a common resource game might be a party guest's decision to take from a food platter. The guest's decisions be affected by how hungry they are, how much of the shared resource (the food) is left and if the guest believes others would judge them for taking more. Experimenters believed that any behavior that did not maximize utility as the result of participant's flawed reasoning. Game theory uses rational choice theory to predict people's decisions in conditions of uncertainty. It understands strategic behavior to be influenced by utility-maximising preferences, as well as player's assumed knowledge of their opponents and material constraints. Traditional game theory is a primarily normative theory as it seeks to pinpoint the decision that rational players should choose, but does not attempt to explain why that decision was made. The ultimatum game requires two players to agree on the allocation of money, yet what is reflected by the game is that humans are more concerned with whether the allocation is fair than whether the benefits are maximized. This behavior also illustrates that behavioral game theory is more well thought out than traditional game theory. * [[keynesian-beauty-contest]] * [[normal-form-game]] Participants complied with Nash Equilibrium only 35% of the time. Further, participants only stated beliefs that their opponents would comply with traditional game theory equilibrium 15% of the time. Participants were more likely to base their decisions on previous outcomes when progressing through the game. Rational choice theory has limitations in interactive decision making, and it is also difficult to accurately predict human behavior in social cooperation. Behavioral games not only require players to make rational choices, but also require players to be able to predict the decisions of other players in their interactions. In game experiments, rational choice conflicts with individual decision making, and individual behavior may be able to achieve greater gains than rational choice. Rational choice theory has limitations and uncertainties for social interaction decisions, so the predicted results are not the same as the experimental results.
Dufwenberg and Kirchsteiger (2004) developed a model based on reciprocity called the sequential reciprocity equilibrium. This model adapts traditional game theory logic to the idea that players reciprocate actions in order to cooperate. The model had been used to more accurately predict experimental outcomes of classic games such as the prisoner's dilemma and the centipede-game. Rabin (1993) also created a fairness equilibrium that measures altruism's effect on choices. He found that when a player is altruistic to another player the second player is more likely to reciprocate that altruism. In this type of game player one receives information about the payouts of option A and option B. Then, player one gives a recommendation to player two about which option to take. Player one can choose to deceive player two, and player two can choose to reject player one's advice. Gneezy found that participants were more sensitive to their gain from lying than to their opponent's loss. Using eye tracking he found that participants who received information about payoffs focused on their own payoff twice as often as their opponents. Predicting rational behavior is possible with game theory but it can be improved if the theory is open to adjustment. The predicted result of the game can be improved and long-lasting if the discipline expands its knowledge of behavioral theory. How people act, think, and feel affect their decisions to play a role in this theory.,. Ken Binmore makes an excellent point that when empirically sound data is present, game theory should not hold the final decision outcome. That this is good for trying to understand if the rational decision being made is due to game theory or is just a consistent behavioral decision being made. The field of economics should try to take every step in improving empirical information in that there is little reliance on just a theory. Businesses value game theory, and the economic discipline must improve the strength of game theory by trying to establish an empirical database. Society will be able to advance its knowledge of behavioral game theory just by expanding the economic discipline of data. Alvin E Roth states, "if we do not take steps in the direction of adding a solid empirical base to game theory, but instead continue to rely on game theory primarily for conceptual insights, then it is likely that long before a hundred-year game theory will have experienced sharply diminishing return"