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

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  • Velu, Chander

    ()
    (University of Cambridge)

  • Iyer, Sriya

    ()
    (University of Cambridge)

  • Gair, Jonathan R.

    ()
    (University of Cambridge)

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    Abstract

    Players cooperate in experiments more than game theory would predict. In order to explain this, we introduce the 'returns-based beliefs' approach: the expected returns of a particular strategy in proportion to the 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 classic games such as the Prisoner's Dilemma. Testing the closeness of fit of our model on Selten and Chmura (2008) data for completely mixed 2x2 games shows that with loss aversion, returns-based beliefs explain the data better than other equilibrium concepts.

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    Bibliographic Info

    Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 6711.

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    Length: 38 pages
    Date of creation: Jul 2012
    Date of revision:
    Handle: RePEc:iza:izadps:dp6711

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    Related research

    Keywords: subjective probabilities; decision making; cooperation;

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