Behavioral Game Theory

Difference to Game Theory

• psychology plays a role
• traditional game theory appears as if they are selfish and rational
• everything can be expressed as a monetary number
  • how much do I have to pay you to “buy your outcome”?
• Utility is only the monetary amount
  • think extra about changes in Marginal Changes
    • e.g. Diminishing Marginal Returns

Greed

Greed is good. Greed is right. Greed works. Greed cuts through, clarifies, and captures the essence of the evolutionary spirit

& Gekko

But:

• Greed leads to monopolies to use their power
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Ultimatum vs Dictator

• dictator game was invented to show how much of the ultimatum game was due to nice offers and how much due to the offerer being afraid of the offer being refused

A better Explanation

Utility & Social Preferences

• the same value is not worth equal amounts to different people
  • think more about utility, less about value or money when Analyzing Games
  • firms are just maximizing profit mostly, minimal social preferences
• humans are social creatures - comparison to others are important
  • i.e. humans are not just rational
• personal preferences
  • e.g. Rivalry - I don’t care how much I earn, as long as it is more than you earn
  • e.g. War - I don’t care how much I lose, as long as it is less than you lose

Inequality aversion

• i am interested in my income
• but also about my income relative to the relative income
• results: inequality aversion
  • I don’t want to be much better/worse off than others
  • If I am already worse off I don’t want the others to have even more
  • If I am already better off I don’t want to have more than other others
• asymmetry: might care more about me being worse off than better off
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Intentions and Reciprocity

• how nice were they to me and how nice I was to them
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• not just result but also intentions matter and the beliefs of both players about each others intentions
• 2 equilibria (unkind/unkind) and (kind/kind)
  • what will be played is dependent of player A’s action
• no reciprocity, B cannot be kind/unkind back towards A

Reciprocity in Labor Market

• people work for their money, even if they are not controlled
• people work harder if they get more money

Altruism and Spite

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Economist Effect

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• result: “Economists are born, not made”

Oxytocin and Brain Scan

• players with higher oxytocin levels are more trusting and more trustworthy
• in recent years it was more feasible to analyse brain waves during the game