Section 3 – Behavioral Game Theory

Sections 1 and 2 covered a big chunk of territory in the field of behavioral economics, where the focus was on identifying and explaining individual behavior in general. We now venture into the equally enriching territory of behavioral game theory where the focus is again on identifying and explaining human behavior. This time, however, we consider individual behavior in a social setting and, from time to time, assess the advantages and disadvantages of teams of individuals.

Referring to the diagram presented in the This Book’s Approach section, Section 3 of the textbook pertains to the diagram’s bottom portion.

Here, we again demonstrate how standard economic theory (in this case, game theory) fails by highlighting the major disconnects between the behavior predicted of Homo economicus and that actually displayed by Homo sapiens in social settings. By “social settings,” we mean game-like situations where two or more individuals compete against each other for payoffs of some kind (typically monetary payoffs, but not always). Most of the games share a tantalizing aspect—analytically speaking, the games are structured such that their equilibria correspond to the individuals having chosen not to cooperate with each other. These are the equilibria we expect Homo economicus to reach.  Cooperation, if it occurs, is typically evinced by Homo sapiens, not Homo economicus. Are you surprised?

One thing you will notice as you learn about the games and participate in them yourselves, is that while it does as equally an effective job as the experimental economics of Kahneman, Tversky, Thaler, et al. in revealing the extent to which Homo sapiens violate the tenets of rational choice, the subfield of behavioral game theory tends not to propose new or revised theories per se. Rather, the main contributions of behavioral game theory are found in the innovative ways in which the original, foundational games have been tweaked over time to account for those violations.

Unless otherwise indicated, the games presented in this section are based on discussions presented in Camerer (2003).