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

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Author Info
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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Publisher 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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Related research
Keywords: risk aversion; mixed strategy equilibria;

Find related papers by JEL classification:
C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
D89 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Other

This paper has been announced in the following NEP Reports:

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  1. 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. [Downloadable!] (restricted)
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  2. 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. [Downloadable!] (restricted)
  3. Ken Binmore & Ariel Rubinstein & Asher Wolinsky, 1986. "The Nash Bargaining Solution in Economic Modelling," RAND Journal of Economics, The RAND Corporation, vol. 17(2), pages 176-188, Summer. [Downloadable!] (restricted)
  4. 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. [Downloadable!] (restricted)
  5. 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. [Downloadable!] (restricted)
  6. Ted To, 1999. "Risk and evolution," Economic Theory, Springer, vol. 13(2), pages 329-343. [Downloadable!] (restricted)
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