Games and Prospects

Abstract:     
We study how the framework of classical game theory changes when the preferences of the players are described by Prospect Theory instead of Expected Utility Theory. Specifically, we study the influence of framing effect and probability weighting on the existence and specific structure of Nash equilibria in pure and mixed strategies for finite games. We demonstrate that in games representing typical interactions in societies, probability weighting of the players can lead to larger common wealth and is, under weak assumptions, evolutionary stable. This observation may provide a possible explanation for the validity of Prospect Theory as a descriptive model in human behavior.

Number of Pages in PDF File: 21

Keywords: Prospect Theory, Existence of Nash Equilibria, Evolutionary stability

JEL Classification: C70, C73, D81

working papers series