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Risk Aversion Pays in the Class of 2 x 2 Games with No Pure Equilibrium

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  • Dirk Engelmann

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Abstract

Simulations indicated that, in the class of 2 x 2 games which only have a mixed equilibrium, payoffs are increased by risk aversion compared to risk neutrality. In this paper I show that the total expected payoff to a player over this class in equilibrium is indeed higher if this player is risk averse than if he is risk neutral provided that all games are played with the same probability. Furthermore, I show that for two subclasses of games more risk aversion is always better, while for a third subclass an intermediate level of risk aversion is preferable.

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Bibliographic Info

Paper provided by The Center for Economic Research and Graduate Education - Economic Institute, Prague in its series CERGE-EI Working Papers with number wp211.

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Date of creation: Jun 2003
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Handle: RePEc:cer:papers:wp211

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Keywords: risk aversion; mixed strategy equilibria;

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  1. Theodore To, 1995. "Risk and Evolution," CRIEFF Discussion Papers 9513, Centre for Research into Industry, Enterprise, Finance and the Firm.
  2. Robson, Arthur J, 1992. "Status, the Distribution of Wealth, Private and Social Attitudes to Risk," Econometrica, Econometric Society, vol. 60(4), pages 837-57, July.
  3. Robson, Arthur J., 1996. "The Evolution of Attitudes to Risk: Lottery Tickets and Relative Wealth," Games and Economic Behavior, Elsevier, vol. 14(2), pages 190-207, June.
  4. Robson, Arthur J., 1996. "A Biological Basis for Expected and Non-expected Utility," Journal of Economic Theory, Elsevier, vol. 68(2), pages 397-424, February.
  5. Dekel, Eddie & Scotchmer, Suzanne, 1999. "On the Evolution of Attitudes towards Risk in Winner-Take-All Games," Journal of Economic Theory, Elsevier, vol. 87(1), pages 125-143, July.
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