Behavioral Game Theory

Attitudes to risk are a key ingredient in most economic decision making. It is vital, therefore, that we have some understanding of the distribution of risk preferences in the population. And ideally we need a simple way of eliciting risk preferences that can be used in the lab or field. Charles Holt and Susan Laury set out one way of doing in this in their 2002 paper ' Risk aversion and incentive effects '. While plenty of other ways of measuring risk aversion have been devised over the years I think it is safe to say that the Holt and Laury approach is the most commonly used (as the near 4000 citations to their paper testifies).           The basic approach taken by Holt and Laury is to offer an individual 10 choices like those in the table below. For each of the 10 choices the individual has to go for option A or option B. Most people go for option A in choice 1. And everyone should go for option B in choice 10. At some point, therefore, we expect the individual to switch

In a standard economic experiment the anonymity of subjects is paramount. This is presumably because of a fear that subjects might behave differently if they knew others were 'watching them' in some sense. In the real world, however, our actions obviously can be observed much of the time. So, it would seem important to occasionally step out of the purified environment of the standard lab experiment and see what happens when we throw anonymity in the bin.         A couple of experiments have looked at behavior in public good games without anonymity. Let me start with the 2004 study of Mari Rege and Kjetil Telle entitled ' The impact of social approval and framing on cooperation in public good games '. As is standard, subjects had to split money between a private account and group account, where contributing to the group account is good for the group. The novelty is in how this was done.       Each subject was given some money and two envelopes, a 'group envelope&

The linear public good game is, as I have mentioned before on this blog, the workhorse of experiments on cooperation. In the basic version of the game there is a group of, say, 4 people. Each person is given an endowment of, say, $10 and asked how much they want to contribute to a public good. Any money a person does not contribute is theirs to keep. Any money that is contributed is multiplied by some factor, say 2, and shared equally amongst group members.          Note that for every $1 a person does not contribute they get a return of $1. But, for every $1 they do contribute they get a return of $0.50 (because the $1 is converted to $2 and then shared equally amongst the 4 group members). It follows that a person maximizes their individual payoff by contributing 0 to the public good. Contributing to the public good does, however, increase total payoffs in the group because each $1 contributed is converted to $2. For example, if everyone keeps their $10 then they each get $10.