Behavioral game theory seeks to examine how people's strategic decision-making behavior is shaped by social preferences, social utility and other psychological factors. Behavioral game theory analyzes interactive strategic decisions and behavior using the methods of game theory,R. J. Aumann (2008). "game theory," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract. experimental economics, and experimental psychology. Experiments include testing deviations from typical simplifications of economic theory such as the independence axiom and neglect of altruism,James Andreoni et al. (2008). "altruism in experiments," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract. fairness,H. Peyton Young (2008). "social norms," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract. and framing effects. As a research program, the subject is a development of the last three decades.• Description , preview ([ctrl]+), and ch. 1 link. * _____, George Loewenstein, and Matthew Rabin, ed. (2003). Advances in Behavioral Economics, Princeton. 1986–2003 papers. Description, contents, and preview. * Drew Fudenberg (2006). "Advancing Beyond Advances in Behavioral Economics," Journal of Economic Literature, 44(3), pp. 694–711. * Vincent P. Crawford (1997). "Theory and Experiment in the Analysis of Strategic Interaction," in Advances in Economics and Econometrics: Theory and Applications, pp. 206–242. Cambridge. Reprinted in Camerer et al. (2003), Advances in Behavioral Economics, Princeton, ch. 12. * Martin Shubik (2002). "Game Theory and Experimental Gaming," in R. Aumann and S. Hart, ed., Handbook of Game Theory with Economic Applications, Elsevier, v. 3, pp. 2327–2351. Abstract. • Charles R. Plott and Vernon L. Smith, ed. (2008). Handbook of Experimental Economics Results, v. 1, Elsevier, Part 4, Games preview and ch. 45–66 preview links. * Games and Economic Behavior, Elsevier. Aims and scope.
Traditional game theory is a critical principle of economic theory, and assumes that people's strategic decisions are shaped by rationality, selfishness and utility maximisation. It focuses on the mathematical structure of equilibria, and tends to use basic rational choice theory and utility maximization as the primary principles within economic models. At the same time rational choice theory is an ideal model that assumes that individuals will actively choose the option with the greatest benefit. The fact is that consumers have different preferences and rational choice theory is not accurate in its assumptions about consumer behavior. In contrast to traditional game theory, behavioral game theory examines how actual human behavior tends to deviate from standard predictions and models. In order to more accurately understand these deviations and determine the factors and conditions involved in strategic decision making, behavioral game theory aims to create new models that incorporate psychological principles. Studies of behavioral game theory demonstrate that choices are not always rational and do not always represent the utility maximizing choice.Camerer, C. (2003). Behavioral game theory: Experiments in strategic interaction. Princeton University Press.
Behavioral game theory largely utilizes empirical and theoretical research to understand human behavior. It also uses laboratory and field experiments, as well as modeling – both theoretical and computational. Recently, methods from machine learning have been applied in work at the intersection of economics, psychology, and computer science to improve both prediction and understanding of behavior in games.
History Behavioral game theory began with the work of Allais in 1953 and Ellsberg in 1961. They discovered the Allais paradox and the Ellsberg paradox, respectively.Gintis, H. (2005). Behavioral game theory and contemporary economic theory. Analyse & Kritik, 27(1), 48-72. Both paradoxes show that choices made by participants in a game do not reflect the benefit they expect to receive from making those choices. In 1956, the work of Vernon Smith showed that economic markets could be examined experimentally rather than only theoretically, and reinforced the importance of rationality and self-interest within economic models. According to rational choice theory, consumers' behavior depends on three reasons. The first reason is that the degree of emotional pleasure consumers derive from their purchases depends on their preferences. The second reason is that consumers do not have enough choices. The third reason is that consumers derive greater pleasure from a limited number of choices. Later in the 1970s, economists Tversky and Kahneman, as well as several other co-workers, conducted experiments that discovered variations of traditional decision-making models such as regret theory, prospect theory, and hyperbolic discounting. These discoveries showed that decision makers consider many factors when making choices. For example, a person may seek to minimize the amount of regret they will feel after making a decision and weigh their options based on the amount of regret they anticipate from each. Due to the fact that these theories were not previously examined by traditional economic theory, factors such as regret along with many others fueled further research on the subject of social preferences and decision making.
Beginning in the 1980s experimenters started examining the conditions that cause divergence from rational choice. Ultimatum and bargaining games examined the effect of emotions on predictions of opponent behavior. One of the most well known examples of an ultimatum game is the television show Deal or No Deal in which participants must make decisions to sell or continue playing based on monetary ultimatums given to them by "the banker." These games also explored the effect of trust on decision-making outcomes and utility maximizing behavior.Gintis, H. (2009). The bounds of reason: Game theory and the unification of the behavioral sciences. Princeton University Press. Common resource games were used to experimentally test how cooperation and social desirability affect subject's choices. A real-life example of a common resource game might be a party guest's decision to take from a food platter. The guest's decisions be affected by how hungry they are, how much of the shared resource (the food) is left and if the guest believes others would judge them for taking more. Experimenters believed that any behavior that did not maximize utility as the result of participant's flawed reasoning. By the turn of the century economists and psychologists expanded this research. Models based on the rational choice theory were adapted to reflect decision maker preferences and attempt to rationalize choices that did not maximize utility.
Comparison to traditional game theory There are various distinctions between traditional game theory and behavioral game theory. Traditional game theory uses theoretical and mathematical models to determine the most beneficial choice of all players in a game.Osborne, M. J., & Rubinstein, A. (1994). A course in game theory. MIT press. Game theory uses rational choice theory to predict people's decisions in conditions of uncertainty. It understands strategic behavior to be influenced by utility-maximising preferences, as well as player's assumed knowledge of their opponents and material constraints. It also allows for players to predict their opponents' strategies. Also consumers' decisions are affected by psychological issues, and inattentional blindness is important in influencing the outcome of decisions. This is due to the fact that when consumers' attention is focused on one thing, they ignore other choices. Inattentional blindness believes that human attention and cognition are limited, which explains why consumers will make choices based on their personal preferences.Colman, A. M. (2003). Cooperation, psychological game theory, and limitations of rationality in social interaction. Behavioral and Brain Sciences, 26(02), 139-153. Traditional game theory is a primarily normative theory as it seeks to pinpoint the decision that rational players should choose, but does not attempt to explain why that decision was made. Rationality is a primary assumption of game theory, so there are not explanations for different forms of rational decisions or irrational decisions.
In contrast to traditional game theory, behavioral game theory uses empirical models to explain how social preferences, such as ideals of fairness, efficiency or equity, influence human decisions and strategic reasoning. Behavioral game theory attempts to explain factors that influence real-world decisions. These factors are not explored in the area of traditional game theory, but can be postulated and observed using empirical data. Findings from behavioral game theory will tend to have higher external validity and can be better applied to real world decision-making behavior. Behavioral game theory is a primarily positive theory rather than a normative theory. A positive theory seeks to describe phenomena rather than prescribe a correct action. Positive theories must be testable and can be proven true or false. A normative theory is subjective and based on opinions. Because of this, normative theories cannot be proven true or false. Behavioral game theory attempts to explain decision making using experimental data. The theory allows for rational and irrational decisions because both are examined using real-life experiments in the form of simple games. Simple games are often used in behavioral game theory research as a way of analyzing unexplored phenomena, such as social preferences and social utility, that are not explored in traditional game theory.
Examining social utility and preferences through games Simple games are regularly utilized in behavioral game theory experiments in order to examine player's social utility. The simplicity of these games means that players do not face intellectual challenges, and player's choices are not impacted or altered by the game itself. This makes the games extremely useful in understanding social preferences. Games often include monetary rewards to easily calculate how players will act if their choices are driven by monetary incentives and payoffs. Player's actions are often shaped by the social utility function, whereby their choices are shaped by the benefits that both they and their opponent would receive. Traditional game theory would expect rational players to attempt to maximise their monetary rewards. If these calculations were wrong, however, and if players choose not to maximise their utility, then players would be exhibiting a social preference for a particular action. Behavioral game theory explains how players often deviate from traditional norms, and quite regularly consider factors such as social welfare when making their strategic decisions. For example, players are known to sacrifice high monetary rewards in order to maintain fairness within the game.