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Behavioral game theory


Behavioral game theory analyzes interactive strategic decisions and behavior using the methods of game theory,experimental economics, and experimental psychology. Experiments include testing deviations from typical simplifications of economic theory such as the independence axiom and neglect of altruism,fairness, and framing effects. As a research program, the subject is a development of the last three decades. Traditional game theory focuses on mathematical equilibriums, utility maximizing, and rational choice; in contrast, behavioral game theory focuses on choices made by participants in studies and is game theory applied to experiments. Choices studied in behavioral game theory are not always rational and do not always represent the utility maximizing choice.

Behavioral game theory began with the work of Allais in 1953 and Ellsberg in 1961. They discovered the Allais paradox and the Ellsberg paradox, respectively. Both paradoxes show that choices made by participants in a game do not reflect the benefit they expect to receive from making those choices. In the 1970s the work of Vernon Smith showed that economic markets could be examined experimentally rather than only theoretically. At the same time, several economists conducted experiments that discovered variations of traditional decision-making models such as regret theory, prospect theory, and hyperbolic discounting. These discoveries showed that actual decision makers consider many factors when making choices. For example, a person may seek to minimize the amount of regret they will feel after making a decision and weigh their options based on the amount of regret they anticipate from each. Because they were not previously examined by traditional economic theory, factors such as regret along with many others fueled further research.


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