14.1 Psychological Aspects of Game Theory
5 min read•july 31, 2024
Game theory explores how people make decisions when their choices affect others. It's not just about logic—emotions, biases, and play a big role too. Understanding these psychological factors can help predict behavior in strategic situations.
From the to ultimatum games, experiments reveal how we often deviate from "rational" choices. Factors like fairness, , and cultural differences shape our decisions. This blend of psychology and game theory offers insights into human interaction and cooperation.
Game Theory's Psychological Foundations
Core Concepts and Equilibria
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- Game theory analyzes strategic interactions between rational decision-makers with applications in psychology, economics, and social sciences
- represents a state where no player can unilaterally improve their outcome by changing their strategy
- Prisoner's dilemma demonstrates the tension between individual and collective rationality
- incorporates beliefs, intentions, and motivations of players into the traditional framework
- acknowledges human decision-makers have limited cognitive resources and often use heuristics rather than optimal strategies
- refers to information known by all players, and all players know that all players know it, and so on
- Example: In a coordination game, players may have common knowledge about meeting locations (Grand Central Station)
Evolutionary and Applied Perspectives
- applies game-theoretic principles to understand how behaviors and strategies evolve over time in populations
- Example: Evolution of cooperation in repeated prisoner's dilemma scenarios
- explains how individuals evaluate potential losses and gains differently, affecting risk preferences in game scenarios
- Example: Players may be more risk-averse when facing potential losses than when facing potential gains
- leads players to overestimate the probability of certain outcomes based on easily recalled information or recent experiences
- Example: Overestimating the likelihood of a particular strategy succeeding after witnessing it work in a recent game
Cognitive Biases in Strategic Decision Making
Information Processing Biases
- causes players to seek out and interpret information that confirms their pre-existing beliefs about optimal strategies
- Example: A player might focus on instances where their preferred strategy worked while ignoring contradictory evidence
- influences players' decisions by causing them to rely too heavily on an initial piece of information when making subsequent judgments
- Example: Initial offer in a negotiation game serving as an anchor for future counteroffers
- causes players to make judgments about the probability of an event based on how closely it resembles their mental prototype
- Example: Assuming a player who has won several rounds in a row is more skilled, even if the game is purely chance-based
Judgment and Decision-Making Biases
- leads players to overestimate their abilities or the accuracy of their predictions in game situations
- Example: A poker player overestimating their chances of winning based on past successes
- demonstrate how the presentation of equivalent decision problems can lead to systematically different choices in games
- Example: Players choosing differently when a payoff presented as a gain versus a loss, despite identical outcomes
- impacts how players value and trade resources within a game context
- Example: Players assigning higher value to items they possess compared to identical items they don't own
Emotions and Social Norms in Games
Emotional Influences on Game Behavior
- Emotional states significantly influence risk-taking behavior and strategic choices in games
- Example: Angry players may make more aggressive and less calculated moves in a negotiation game
- posits that players may choose strategies to avoid feelings of guilt associated with disappointing others' expectations
- Example: A player cooperating in a prisoner's dilemma to avoid feeling guilty about betraying their partner
- Trust and trustworthiness play crucial roles in determining game outcomes
- Example: In a trust game, the first player's willingness to entrust resources to the second player affects the overall payoff
Social Preferences and Cultural Factors
- explain how individuals may consider fairness, reciprocity, and altruism in their decision-making processes
- Example: Players in the rejecting unfair offers despite personal economic loss
- Social norms and cultural differences lead to variations in game-theoretic outcomes across different populations or contexts
- Example: Collectivist cultures showing higher levels of cooperation in compared to individualist cultures
- in repeated games demonstrate how concerns about future interactions can modify players' strategies and promote cooperation
- Example: Players building a reputation for trustworthiness in iterated prisoner's dilemma to encourage long-term cooperation
Applying Psychology to Game Scenarios
Classic Experimental Games
- Ultimatum game reveals how fairness considerations and emotional responses to perceived injustice can override purely rational economic decision-making
- Example: Responders rejecting low offers even at a personal cost
- Public goods games illustrate how individual and collective interests can conflict, leading to suboptimal outcomes
- Example: Players free-riding on others' contributions, resulting in underprovision of the public good
- demonstrates how social preferences and cultural norms can influence resource allocation decisions in the absence of strategic considerations
- Example: Dictators allocating non-zero amounts to recipients despite no strategic incentive to do so
Advanced Game Scenarios
- highlight the importance of focal points and shared cultural knowledge in achieving efficient outcomes
- Example: Players coordinating on a meeting place without communication by choosing a culturally significant location
- reveals how players reason about others' reasoning, demonstrating the concept of iterative thinking in strategic situations
- Example: Players choosing numbers based on their predictions of others' choices, leading to a convergence towards zero
- uses experimental methods to test how well game-theoretic predictions align with actual human behavior in various scenarios
- Example: Comparing Nash equilibrium predictions with observed behavior in laboratory experiments
- models applied to game theory explain how players adapt their strategies over time based on past experiences and outcomes
- Example: Players adjusting their strategies in repeated games based on the success or failure of previous choices
Key Terms to Review (26)
Anchoring Effect: The anchoring effect is a cognitive bias where individuals rely too heavily on the first piece of information they encounter when making decisions. This initial information sets a reference point that influences subsequent judgments, often leading to skewed or irrational decision-making.
Availability heuristic: The availability heuristic is a mental shortcut that relies on immediate examples that come to mind when evaluating a specific topic, concept, method, or decision. This cognitive bias can lead individuals to overestimate the importance or frequency of events based on how easily they can recall similar instances, influencing various economic behaviors and decisions.
Beauty contest game: The beauty contest game is a type of game theory scenario where players must choose a number in order to be closest to a target number, often representing the average of all chosen numbers. This game highlights how individuals make decisions based on predicting the choices of others, revealing insights into collective behavior and strategic thinking. The concept is tied to psychological aspects as it demonstrates how people's expectations and beliefs about others' choices can influence their own decision-making process.
Behavioral game theory: Behavioral game theory combines insights from psychology and economics to better understand how people make decisions in strategic situations. It recognizes that individuals often deviate from the traditional rational actor model, influenced by emotions, social norms, and cognitive biases. This perspective enhances our understanding of strategic interactions by considering how real human behavior differs from purely rational calculations.
Bounded rationality: Bounded rationality refers to the concept that individuals make decisions based on limited information and cognitive limitations, rather than striving for complete rationality. This means that while people aim to make the best choices, they often rely on heuristics and simplified models, leading to decisions that may be satisfactory but not necessarily optimal.
Common Knowledge: Common knowledge refers to information that is known by a large number of people and is generally accepted as true without requiring specific attribution. This concept is crucial in decision-making contexts, especially in game theory, where the actions and strategies of players are often influenced by the understanding of what others know and believe.
Confirmation bias: Confirmation bias is the tendency to search for, interpret, and remember information in a way that confirms one’s preexisting beliefs or hypotheses, while giving disproportionately less consideration to alternative possibilities. This cognitive shortcut can heavily influence economic decision-making by shaping perceptions and choices based on selective evidence.
Coordination Games: Coordination games are a type of game in game theory where all participants benefit from making the same choices or decisions. These games highlight situations where players must align their strategies to achieve the best possible outcomes, often relying on shared expectations or signals to coordinate their actions effectively. The psychological aspects of these games revolve around how individuals perceive the need for cooperation and alignment, while their applications in organizational behavior focus on fostering teamwork and collaborative decision-making.
Dictator game: The dictator game is a simple economic experiment where one participant, known as the 'dictator,' determines how to split a certain amount of resources between themselves and another participant, who has no input in the decision. This game is designed to study concepts such as fairness, altruism, and social preferences in economic interactions, illustrating how individuals navigate choices in situations where they hold power over others.
Endowment Effect: The endowment effect is a cognitive bias where individuals value an item more highly simply because they own it. This phenomenon impacts how people make economic decisions, leading to irrational behaviors that deviate from traditional economic theories.
Evolutionary game theory: Evolutionary game theory is a theoretical framework that applies the principles of game theory to understand the strategies and behaviors of organisms in biological contexts. It combines aspects of evolutionary biology and game theory to analyze how strategies evolve over time through natural selection, focusing on the interactions between individuals and their environment.
Framing Effects: Framing effects refer to the way information is presented, which can significantly influence people's decisions and judgments. This concept highlights how different representations of the same choice can lead to different outcomes, showing that context and presentation matter in economic decision-making.
Guilt aversion theory: Guilt aversion theory is the idea that individuals may avoid actions that could cause them to feel guilty, especially in social situations where their decisions affect others. This theory suggests that people are motivated by the desire to maintain positive social relationships and avoid the negative emotional consequences of guilt, leading to cooperative behavior in strategic interactions.
Nash Equilibrium: Nash Equilibrium is a concept within game theory where no player can benefit from unilaterally changing their strategy, given the strategies of all other players remain unchanged. This idea is crucial in understanding how individuals or organizations make decisions when their outcomes depend on the choices of others. It reflects a stable state in competitive situations where each participant's strategy is optimal, considering the strategies of others, and is often used to analyze economic behaviors, negotiation tactics, and cooperative scenarios.
Overconfidence Bias: Overconfidence bias is a cognitive bias that leads individuals to overestimate their knowledge, abilities, and the accuracy of their predictions. This bias can significantly influence economic behavior by skewing decision-making processes and leading to excessive risk-taking, as people believe they are more capable than they actually are.
Prisoner's dilemma: The prisoner's dilemma is a fundamental concept in game theory illustrating a scenario where two individuals, acting in their self-interest, fail to cooperate, resulting in a worse outcome for both. This situation highlights how trust and cooperation can be undermined by individual incentives, influencing strategic decision-making in economic settings.
Prospect Theory: Prospect theory is a behavioral economic theory that describes how individuals evaluate potential losses and gains when making decisions under risk. It highlights the way people perceive gains and losses differently, leading to decisions that often deviate from expected utility theory, particularly emphasizing the impact of loss aversion and reference points in their choices.
Psychological game theory: Psychological game theory extends traditional game theory by incorporating psychological factors, such as beliefs, emotions, and social preferences, into the analysis of strategic interactions. This approach recognizes that players are not solely rational actors but also motivated by psychological influences, making their decisions more complex and nuanced than standard models suggest.
Public goods games: Public goods games are experimental setups in game theory where individuals must decide how much to contribute to a common resource, such as funding for public goods, knowing that their contributions benefit all participants regardless of their individual investment. These games highlight the tension between self-interest and collective benefit, as players must balance their personal gains against the welfare of the group.
Reinforcement Learning: Reinforcement learning is a type of machine learning where an agent learns to make decisions by taking actions in an environment to maximize cumulative rewards over time. This process often involves the agent experiencing outcomes that can evoke feelings of regret or anticipation based on its previous choices, highlighting the emotional and cognitive components involved in decision-making. The interaction between agents and their environment is central to understanding how choices are made, especially in competitive situations.
Representativeness Heuristic: The representativeness heuristic is a cognitive shortcut that relies on how closely an event or object resembles a particular prototype or category, leading individuals to make judgments based on perceived similarities rather than statistical reasoning. This mental shortcut can lead to biases in decision-making, especially in economic contexts, as people often overlook important information such as probabilities and base rates.
Reputation effects: Reputation effects refer to the influence that an individual's or organization's perceived reputation has on their decision-making and interactions in economic environments. A good reputation can lead to increased trust and cooperation from others, while a poor reputation can result in distrust and reluctance to engage. These effects play a crucial role in promoting cooperative behavior among individuals and entities, as maintaining a positive reputation often encourages players to act in ways that foster collaboration and long-term relationships.
Social Norms: Social norms are the unwritten rules and expectations that govern behavior within a group or society. They shape how individuals make economic decisions by influencing their perceptions of acceptable behavior, trust, and cooperation in various economic contexts.
Social preferences: Social preferences refer to the ways individuals consider the welfare of others in their economic decisions, often prioritizing fairness, altruism, or reciprocity over pure self-interest. This concept highlights that people are not just motivated by their own outcomes but also take into account how their actions affect others, which has significant implications for decision-making in various contexts.
Trust: Trust is the firm belief in the reliability, truth, ability, or strength of someone or something. It plays a crucial role in shaping consumer behavior, as it influences brand perception and loyalty, and is also central to decision-making processes in competitive environments, where players must rely on the intentions and actions of others.
Ultimatum game: The ultimatum game is a standard economic experiment that explores how people make decisions about fairness and negotiation. In this game, one player proposes a division of a sum of money, and the second player can either accept the offer or reject it, leading to both players receiving nothing if rejected. This setup highlights aspects of reciprocity, fairness, psychological motivations, and behavioral strategies in economic interactions.