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

  • Velu, Chander

    ()

    (University of Cambridge)

  • Iyer, Sriya

    ()

    (University of Cambridge)

  • Gair, Jonathan R.

    ()

    (University of Cambridge)

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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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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  1. Jacob K Goeree & Charles A Holt, 2004. "Ten Little Treasures of Game Theory and Ten Intuitive Contradictions," Levine's Working Paper Archive 618897000000000900, David K. Levine.
  2. Vincent P. Crawford & Miguel A. Costa-Gomes, 2006. "Cognition and Behavior in Two-Person Guessing Games: An Experimental Study," American Economic Review, American Economic Association, vol. 96(5), pages 1737-1768, December.
  3. Reinhard Selten & Thorsten Chmura, 2005. "Stationary Concepts for Experimental 2x2 Games," Bonn Econ Discussion Papers bgse33_2005, University of Bonn, Germany.
  4. 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.
  5. Colin F. Camerer & Teck-Hua Ho & Juin-Kuan Chong, 2004. "A Cognitive Hierarchy Model of Games," The Quarterly Journal of Economics, Oxford University Press, vol. 119(3), pages 861-898.
  6. Ernst Fehr & Simon Gaechter, 2003. "Altruistic Punishment in Humans," Microeconomics 0305006, EconWPA.
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