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

38 Pages Posted: 21 Jul 2012

See all articles by Chander K. Velu

Chander K. Velu

University of Cambridge - Judge Business School

Sriya Iyer

University of Cambridge

Jonathan R. Gair

affiliation not provided to SSRN

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.

Keywords: subjective probabilities, decision making, cooperation

JEL Classification: D01, D03

Suggested Citation

Velu, Chander K. and Iyer, Sriya and Gair, Jonathan R., A Reason for Unreason: Returns-Based Beliefs in Game Theory. IZA Discussion Paper No. 6711, Available at SSRN: https://ssrn.com/abstract=2114891 or http://dx.doi.org/10.2139/ssrn.2114891

Chander K. Velu (Contact Author)

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

Sriya Iyer

University of Cambridge ( email )

Austin Robinson Building
Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom

Jonathan R. Gair

affiliation not provided to SSRN ( email )

No Address Available

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