Behavioral game theory
Experiments include testing deviations from typical simplifications of economic theory such as the independence axiom[3] and neglect of altruism,[4] fairness,[5] and framing effects.
[7] It focuses on the mathematical structure of equilibria, and tends to use basic rational choice theory and utility maximization as the primary principles within economic models.
At the same time rational choice theory is an ideal model that assumes that individuals will actively choose the option with the greatest benefit.
In order to more accurately understand these deviations and determine the factors and conditions involved in strategic decision making, behavioral game theory aims to create new models that incorporate psychological principles.
[9] Recently, methods from machine learning have been applied in work at the intersection of economics, psychology, and computer science to improve both prediction and understanding of behavior in games.
[12] 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.
It understands strategic behavior to be influenced by utility-maximising preferences, as well as player's assumed knowledge of their opponents and material constraints.
Inattentional blindness believes that human attention and cognition are limited, which explains why consumers will make choices based on their personal preferences.
[14] These factors are not explored in the area of traditional game theory, but can be postulated and observed using empirical data.
[14] The theory allows for rational and irrational decisions because both are examined using real-life experiments in the form of simple games.
[1] Traditional game theory would expect rational players to attempt to maximise their monetary rewards.
[7] Behavioral game theory explains how players often deviate from traditional norms, and quite regularly consider factors such as social welfare when making their strategic decisions.
[1] This represents negative reciprocity preferences, as players would rather sacrifice their payoff in order to punish their opponent for their unkind behavior.
[1] However, in an attempt to reach a fair equilibrium for both players, results from the prisoner's dilemma game show that people cooperate much more than traditionally thought.
Learning models are a way of explaining and predicting strategic decisions in behavioral game theory.
Further, participants only stated beliefs that their opponents would comply with traditional game theory equilibrium 15% of the time.
[20] Social behavior and cooperation with other participants are two factors that are not modeled in traditional game theory, but are often seen in an experimental setting.
[21] Rational choice theory has limitations in interactive decision making, and it is also difficult to accurately predict human behavior in social cooperation.
This model adapts traditional game theory logic to the idea that players reciprocate actions in order to cooperate.
[20] Studying the contestant's choices formed the conclusion that, in a sequential game with high stakes, decisions were based on previous outcomes rather than rationality.
The lucky or unlucky players were willing to reject offers of over one hundred percent of the expected value of their case in order to continue playing.
Riskier behavior in unlucky contestants can be attributed to the break-even effect, which states that gamblers will continue to make risky decisions in order to win back money.
[20] On the other hand, riskier behavior in lucky contestants can be explained by the house-money effect, which states that winning gamblers are more likely to make risky decisions because they perceive that they are not gambling with their own money.
[24] He also found that participants were not wholly selfish and cared about how much their opponents lost from their deception, but this effect diminished as their own payout increased.
[25] These findings show that factors such as incentives, consequences, and deception can create irrational decisions and affect the way games unfold.
The predicted result of the game can be improved and long-lasting if the discipline expands its knowledge of behavioral theory.
Ken Binmore makes an excellent point that when empirically sound data is present, game theory should not hold the final decision outcome.
Society will be able to advance its knowledge of behavioral game theory just by expanding the economic discipline of data.
[28] Kocher and Sutter (2005) used a beauty contest game to study and compare individual and group behavior.
