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On Loss Aversion in Bimatrix Games

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  • Bram Driesen

    ()

  • Andrés Perea

    ()

  • Hans Peters

    ()

Abstract

In this paper we study three different types of loss aversion equilibria in bimatrix games. Loss aversion equilibria are Nash equilibria of games where players are loss averse and where the reference points – points below which they consider payoffs to be losses – are endogenous to the equilibrium calculation. The first type is the fixed point loss aversion equilibrium, introduced in Shalev (2000) under the name of ‘myopic loss aversion equilibrium’. There, the players’ reference points depend on the beliefs about their opponents’ strategies. The second type, the maximin loss aversion equilibrium, differs from the fixed point loss aversion equilibrium in that the reference point is now only based on the carrier of the players’ beliefs, not on the exact probabilities. In the third, the safety level loss aversion equilibrium, this dependence is completely dispensed with. Finally, we do a comparative statics analysis of all three equilibrium concepts in 2-by-2 bimatrix games. The results indicate that a player, under some conditions, benefits from his opponent falsely believing he is loss averse.

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Bibliographic Info

Article provided by Springer in its journal Theory and Decision.

Volume (Year): 68 (2010)
Issue (Month): 4 (April)
Pages: 367-391

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Handle: RePEc:kap:theord:v:68:y:2010:i:4:p:367-391

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Web page: http://www.springerlink.com/link.asp?id=100341

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Keywords: bimatrix games; loss aversion; reference-dependence; C72;

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  1. Fershtman, Chaim, 1996. "On the value of incumbency managerial reference points and loss aversion," Journal of Economic Psychology, Elsevier, Elsevier, vol. 17(2), pages 245-257, April.
  2. SHALEV, Jonathan, 1997. "Loss aversion equilibrium," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 1997023, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Dekel, Eddie & Safra, Zvi & Segal, Uzi, 1991. "Existence and dynamic consistency of Nash equilibrium with non-expected utility preferences," Journal of Economic Theory, Elsevier, vol. 55(2), pages 229-246, December.
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  5. Camerer, Colin F., 1998. "Prospect Theory in the Wild: Evidence From the Field," Working Papers, California Institute of Technology, Division of the Humanities and Social Sciences 1037, California Institute of Technology, Division of the Humanities and Social Sciences.
  6. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, Econometric Society, vol. 47(2), pages 263-91, March.
  7. Berden,Caroline & Peters,Hans, 2005. "On the effect of risk aversion in bimatrix games," Research Memorandum 029, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  8. Bram Driesen & Andrés Perea & Hans Peters, 2010. "On Loss Aversion in Bimatrix Games," Theory and Decision, Springer, Springer, vol. 68(4), pages 367-391, April.
  9. Machina, Mark J, 1987. "Choice under Uncertainty: Problems Solved and Unsolved," Journal of Economic Perspectives, American Economic Association, vol. 1(1), pages 121-54, Summer.
  10. John C. Hershey & Howard C. Kunreuther & Paul J. H. Schoemaker, 1982. "Sources of Bias in Assessment Procedures for Utility Functions," Management Science, INFORMS, INFORMS, vol. 28(8), pages 936-954, August.
  11. Eichberger, Jurgen & Kelsey, David, 2000. "Non-Additive Beliefs and Strategic Equilibria," Games and Economic Behavior, Elsevier, vol. 30(2), pages 183-215, February.
  12. Schoemaker, Paul J H, 1982. "The Expected Utility Model: Its Variants, Purposes, Evidence and Limitations," Journal of Economic Literature, American Economic Association, vol. 20(2), pages 529-63, June.
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Cited by:
  1. Bram Driesen & Andrés Perea & Hans Peters, 2010. "On Loss Aversion in Bimatrix Games," Theory and Decision, Springer, Springer, vol. 68(4), pages 367-391, April.
  2. Peters Hans, 2010. "A preference foundation for constant loss aversion," Research Memorandum 062, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).

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