1 Duke Doctoral Summer Camp August, 2007 Behavioral Game Theory Teck H. Ho University of California, Berkeley

2 Duke Doctoral Summer Camp August, 2007 Outline  Motivation  Mutual Consistency: CH Model  Noisy Best-Response: QRE Model  Instant Convergence: EWA Learning

3 Duke Doctoral Summer Camp August, 2007 Dual Pillars of Economic Analysis  Specification of Utility  Only final allocation matters  Self-interest  Exponential discounting  Solution Method  Nash equilibrium and its refinements (instant equilibration)

4 Duke Doctoral Summer Camp August, 2007 Motivation: Utility Specification  Reference point matters: People care both about the final allocation as well as the changes with respect to a target level  Fairness: John cares about Mary’s payoff. In addition, the marginal utility of John with respect to an increase in Mary’s income increases when Mary is kind to John and decreases when Mary is unkind  Hyperbolic discounting: People are impatient and prefer instant gratification

5 Duke Doctoral Summer Camp August, 2007 Motivation: Solution Method  Nash equilibrium and its refinements: Dominant theories in marketing for predicting behaviors in non-cooperative games.  Subjects do not play Nash in many one-shot games.  Behaviors do not converge to Nash with repeated interactions in some games.  Multiplicity problem (e.g., coordination games).  Anything go in infinitely repeated games.  Modeling subject heterogeneity really matters in games.

6 Duke Doctoral Summer Camp August, 2007 Bounded Rationality in Markets: Revised Utility Function Ho, Lim, and Camerer (JMR, 2006)

7 Duke Doctoral Summer Camp August, 2007 Bounded Rationality in Markets: Alternative Solution Methods

8 Duke Doctoral Summer Camp August, 2007 Standard Assumptions in Equilibrium Analysis

9 Duke Doctoral Summer Camp August, 2007 Modeling Philosophy Simple(Economics) General(Economics) Precise(Economics) Empirically disciplined(Psychology) “the empirical background of economic science is definitely inadequate...it would have been absurd in physics to expect Kepler and Newton without Tycho Brahe” (von Neumann & Morgenstern ‘44) “Without having a broad set of facts on which to theorize, there is a certain danger of spending too much time on models that are mathematically elegant, yet have little connection to actual behavior. At present our empirical knowledge is inadequate...” (Eric Van Damme ‘95)

10 Duke Doctoral Summer Camp August, 2007 Application: Strategic IQ  A battery of 30 "well-known" games  Measure a subject's strategic IQ by how much money they make (matched against a defined pool of subjects)  Measure how a Nash player performs  Benchmark other types of players (e.g., CH and QRE) against Nash

11 Duke Doctoral Summer Camp August, 2007 Outline  Motivation  Mutual Consistency: CH Model  Noisy Best-Response: QRE Model  Instant Convergence: EWA Learning