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On Loss Aversion in Bimatrix Games

  • Bram Driesen


  • Andrés Perea


  • Hans Peters


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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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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  1. Caroline Berden & Hans Peters, 2006. "On the Effect of Risk Aversion in Bimatrix Games," Theory and Decision, Springer, vol. 60(4), pages 359-370, 06.
  2. Jonathan Shalev, 2000. "Loss aversion equilibrium," International Journal of Game Theory, Springer, vol. 29(2), pages 269-287.
  3. Driesen Bram & Perea Andrés & Peters Hans, 2007. "On loss aversion in bimatrix games," Research Memorandum 033, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  4. 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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  6. 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.
  7. Eichberger, Jurgen & Kelsey, David, 2000. "Non-Additive Beliefs and Strategic Equilibria," Games and Economic Behavior, Elsevier, vol. 30(2), pages 183-215, February.
  8. Chaim Fershtman, 1993. "On the Value of Incumbency: Managerial Reference Point and Loss Aversion," Discussion Papers 1020, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
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