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...

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 'g...

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 con...

Few, if any, have contributed as much to game theory as Thomas Schelling. Or, to perhaps be more accurate, surely nobody has more powerfully shown the value of applying game theory to understand the world around us. As we reflect on Schelling's contribution to knowledge, following his death in December , I think it is particularly useful to look back on one of his less touted but fundamental observations - conflict is rarely a zero-sum game.           To put Schelling's insight in perspective it is important to recognise that the early development of game theory was hugely influenced by zero-sum games. These are games in which total payoffs always sum to zero meaning that one player's gain must be another player's loss. Sporting and parlour games, like chess and bridge, are naturally modelled as zero-sum because they are about winning and losing. Zero-sum games also have some nice theoreti...

The basic idea behind a linear public good game is as follows: You have a group of people, typically four in the lab, who are endowed with a certain of money, say $5. Each group member is independently asked how much they want to contribute towards a public good. Any dollar that is contributed results in everyone in the group getting a return of, say, $0.40.           From an individual's perspective contributing towards the group looks like a bad deal because you contribute $1 and only get back $0.40. Note, however, that from the group's perspective a contribution of $1 results in a total return of 4 x 0.4 = $1.60. So, from the group's perspective it is good to contribute. For instance, if all four group members contribute $5 then each gets 4 x 5 x 0.4 = $8. And $8 is better than $5.            'Standard economic theory' gives a very simple prediction in a linea...

One of the more bizarre aspects of the recent US Presidential election campaign was the ability of Donald Trump to tell more lies and half-truths than most of us would do in a lifetime and yet still claim that Hilary Clinton could not be trusted in office. Even more bizarre, was the fact that he got away with it! How can we possible make sense of this? Some might point to a dumb electorate. I think we can learn more by looking at guilt aversion.              The concept of guilt aversion was formally introduced into game theory by Pierpaolo Battigalli and Martin Dufwenberg with a paper published in the American Economic Review in 2007. (I should also mention a paper  by Gary Charness and Martin Dufwenberg in Econometrica in 2006.) The basic idea is that a person only needs to feel guilt if they disappoint the expectations of others . To illustrate, consider Donald Trump's 'promise' to loc...

A few days ago we heard the story of how a waitress rescued an 86 year old lady who been stuck in her bath for four days. The waitress contacted the police after becoming concerned that Doreen had not come in for her usual lunch and wine. A story with a happy ending.          A story with a not so happy ending is the infamous murder of Kitty Genovese in 1964 in New York. This murder caught the public's attention because of the supposed number of witnesses who did nothing to stop the crime. The exact details of what happened are debated . One thing is, however, for certain: Several people must have seen or heard the attack and  none of them called the police.         To try and make sense of these conflicting stories let us look at simple game theoretic model. Suppose that there is someone called Doreen that needs rescuing and there are n witnesses who can call the police. If (at least) one person calls the police then Doreen...