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A Reason for Unreason: Returns-Based Beliefs in Game Theory

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  • Velu, C.
  • Iyer, S.
  • Gair, J.R.

Abstract

Players cooperate in experiments more than game theory would predict. We introduce the ‘returns-based beliefs’ approach: the expected returns of a particular strategy in proportion to total expected returns of all strategies. Using a decision analytic solution concept, Luce’s (1959) probabilistic choice model, and ‘hyperpriors’ for ambiguity in players’ cooperability, our approach explains empirical observations in various classes of games including the Prisoner’s and Traveler’s Dilemmas. Testing the closeness of fit of our model on Selten and Chmura (2008) data for completely mixed 2 × 2 games shows that with loss aversion, returns-based beliefs explain the data better than other equilibrium concepts.

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File URL: http://www.econ.cam.ac.uk/research/repec/cam/pdf/cwpe1058.pdf
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Bibliographic Info

Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 1058.

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Date of creation: 01 Oct 2010
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Handle: RePEc:cam:camdae:1058

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Web page: http://www.econ.cam.ac.uk/index.htm

Related research

Keywords: Rationality; Subjective Probabilities; Returns-Based Beliefs;

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  1. Ernst Fehr & Simon Gaechter, 2003. "Altruistic Punishment in Humans," Microeconomics 0305006, EconWPA.
  2. Jacob K. Goeree & Charles A. Holt, 2000. "Ten Little Treasures of Game Theory and Ten Intuitive Contradictions," Virginia Economics Online Papers 333, University of Virginia, Department of Economics.
  3. James W. Bono & David H. Wolpert, 2009. "How to Use Decision Theory to Choose Among Mechanisms," Working Papers 2009-11, American University, Department of Economics.
  4. Reinhard Selten & Thorsten Chmura, 2008. "Stationary Concepts for Experimental 2x2-Games," American Economic Review, American Economic Association, vol. 98(3), pages 938-66, June.
  5. Costa-Gomes, Miguel A. & Crawford, Vincent P., 2004. "Cognition and Behavior in Two-Person Guessing Games: An Experimental Study," University of California at San Diego, Economics Working Paper Series qt449812fx, Department of Economics, UC San Diego.
  6. Colin F. Camerer & Teck-Hua Ho & Juin-Kuan Chong, 2004. "A Cognitive Hierarchy Model of Games," The Quarterly Journal of Economics, MIT Press, vol. 119(3), pages 861-898, August.
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