Behavioral Game Theory

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Behavioral Game Theory
Teck H. Ho University of California, Berkeley
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Outline

• Motivation
• Mutual Consistency CH Model
• Noisy Best-Response QRE Model
• Instant Convergence EWA Learning

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Dual Pillars of Economic Analysis

• Specification of Utility
• Only final allocation matters
• Self-interest
• Exponential discounting
• Solution Method
• Nash equilibrium and its refinements (instant
  equilibration)

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Motivation Utility Specification

• Reference point matters People care both about
  the final allocation as well as the changes with
  respect to a target level
• Fairness John cares about Marys payoff. In
  addition, the marginal utility of John with
  respect to an increase in Marys income increases
  when Mary is kind to John and decreases when Mary
  is unkind
• Hyperbolic discounting People are impatient and
  prefer instant gratification

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Motivation Solution Method

• Nash equilibrium and its refinements Dominant
  theories in marketing for predicting behaviors in
  non-cooperative games.
• Subjects do not play Nash in many one-shot games.
• Behaviors do not converge to Nash with repeated
  interactions in some games.
• Multiplicity problem (e.g., coordination games).
• Anything go in infinitely repeated games.
• Modeling subject heterogeneity really matters in
  games.

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Bounded Rationality in Markets Revised Utility
Function
Ho, Lim, and Camerer (JMR, 2006)
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Bounded Rationality in Markets Alternative
Solution Methods
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Standard Assumptions in Equilibrium Analysis
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Modeling Philosophy

• Simple (Economics)
• General (Economics)
• Precise (Economics)
• Empirically disciplined (Psychology)
• the empirical background of economic science is
  definitely inadequate...it would have been absurd
  in physics to expect Kepler and Newton without
  Tycho Brahe (von Neumann Morgenstern 44)
• Without having a broad set of facts on which to
  theorize, there is a certain danger of spending
  too much time on models that are mathematically
  elegant, yet have little connection to actual
  behavior. At present our empirical knowledge is
  inadequate... (Eric Van Damme 95)

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Application Strategic IQ
http//128.32.75.8/siq/default1.asp

• A battery of 30 "well-known" games
• Measure a subject's strategic IQ by how much
  money they make (matched against a defined pool
  of subjects)
• Measure how a Nash player performs
• Benchmark other types of players (e.g., CH and
  QRE) against Nash

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Outline

• Motivation
• Mutual Consistency CH Model
• Noisy Best-Response QRE Model
• Instant Convergence EWA Learning