Behavioral Game Theory Essay ⋆ Political Science Essay Examples ⋆ EssayEmpire

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Behavioral game theory is a recent approach that adapts game theory to explain and accommodate experimental results that violate typical game theoretic predictions. Game theory applies mathematical analysis to understand human behavior. In particular, game theory assumes that individuals will attempt to form best response strategies to what they believe a partner or opponent will do. The analysis relies on some assumptions, including that individuals are self-interested actors who plan ahead and maximize their expected utility (try to obtain the best possible outcome, given constraints).

One limitation to testing game theory is that many of its predictions are based on variables that are difficult or impossible to observe empirically: personal costs, preferences, strategies, and information. The use of experimental economics allows experimenters to specify these factors and to vary them systematically or to hold them constant in order to observe whether the predicted effects occur. Results from laboratory experiments have frequently been in conflict with game theoretic predictions. These disparities occur in a number of dimensions—all of which call into question key assumptions in game theory. Larry Samuelson argues that the role of experimental results that challenge existing theory is to indicate how to make improvements. Behavioral game theory generalizes the theory by relaxing assumptions that experiments highlight as questionable to incorporate these findings.

Laboratory experiments reveal that instead of being purely self-interested, additional considerations often affect strategies and decisions. Other-regarding behavior, or a concern for fairness, is frequently apparent. Subjects often offer too much in ultimatum bargaining games—games in which a player proposes a share of an amount of money to another who can either accept the proposal or reject it, leaving nothing for either player. This tendency has been seen as a concern for fairness either in terms of a desire for equality or in guessing that the responder will reject an unfair offer.

Experiments also reveal that people do not engage in as much backward induction as game theory would predict. Most players will go no further than two steps of iterated reasoning. Theorists have argued that we should not expect to see sub game-perfect game theoretic behavior, as economists themselves have to work to derive the “proper” proposals in bargaining games. Others note that as a player doubts that an opponent is selecting best response strategies, that player’s choice of strategy can vary also. Behavioral game theory has a number of ways to account for these tendencies. Behavioral game theory extends game theory to incorporate the bounded rationality and learning that are seen in the laboratory. Quantal response analysis depicts a form of bounded rationality in which players use decision rules where probabilities for choices of action are positively, but imperfectly, related to payoffs. Players can form beliefs about the probability that an opponent will play any given strategy. If a player is completely random, not responsive to expected payoffs, we should expect a wide distribution of results. When players are completely responsive to payoffs, the results converge to the Nash equilibria. This type of extension allows understanding and analysis of behavior that should not occur according to standard game theoretic results.

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