Thompson Sampling: Predicting Behavior in Games and Markets
63 Pages Posted: 31 Oct 2017 Last revised: 28 Jul 2020
Date Written: July 28, 2020
This paper proposes Thompson Sampling as a unifying and tractable theory of expectation formation, which is in line with theories of the brain. Thompson Sampling means that in uncertain environments, agents update their beliefs in a Bayesian way, and subsequently make a random draw from the posterior. Conditional on that random draw, agents optimize. Thompson Sampling helps explain data from experimental games, market experiments, and survey data on inflation expectations in a unified fashion. In comparison to other modeling approaches, Thompson Sampling stands out in terms of statistical fit and predictive accuracy.
Keywords: Learning, bounded rationality, behavioral game theory, expectations, stochastic choice
JEL Classification: C91, C92, D84, E37
Suggested Citation: Suggested Citation