14.1 Psychological Aspects of Game Theory

Game theory explores how people make decisions when their choices affect others. It's not just about logic—emotions, biases, and social norms play a big role too. Understanding these psychological factors can help predict behavior in strategic situations.

From the prisoner's dilemma to ultimatum games, experiments reveal how we often deviate from "rational" choices. Factors like fairness, trust, 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
• Nash equilibrium 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
• Psychological game theory incorporates beliefs, intentions, and motivations of players into the traditional framework
• Bounded rationality acknowledges human decision-makers have limited cognitive resources and often use heuristics rather than optimal strategies
• Common knowledge 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

• Evolutionary game theory 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
• Prospect theory 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
• Availability heuristic 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

• Confirmation bias 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
• Anchoring effect 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
• Representativeness heuristic 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

• Overconfidence bias 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
• Framing effects 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
• Endowment effect 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
• Guilt aversion theory 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

• Social preferences explain how individuals may consider fairness, reciprocity, and altruism in their decision-making processes
  • Example: Players in the ultimatum game 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 public goods games compared to individualist cultures
• Reputation effects 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
• Dictator game 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

• Coordination games 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
• Beauty contest game 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
• Behavioral game theory 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
• Reinforcement learning 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