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Faculty of Economics

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Velu, C., Iyer, S. and Gair, J. R.

A Reason for Unreason: Returns-Based Beliefs in Game Theory


Abstract: Players cooperate in experiments more than game theory would predict. We introduce the 'returns-based beliefs' approach: the expected returns of a particular strategy in proportion to total expected returns of all strategies. Using a decision analytic solution concept, Luce’s (1959) probabilistic choice model, and ‘hyperpriors’ for ambiguity in players’ cooperability, our approach explains empirical observations in various classes of games including the Prisoner’s and Traveler’s Dilemmas. Testing the closeness of fit of our model on Selten and Chmura (2008) data for completely mixed 2 × 2 games shows that with loss aversion, returns-based beliefs explain the data better than other equilibrium concepts.

Keywords: Rationality, Subjective Probabilities, Returns-Based Beliefs

Author links: Sriya Iyer  


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