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Game Theory

Definition 1

Study of strategy, tactics (decisions), risks, rewards and the effect of learning in the playing a game.

Source: Behavioral Science Lab, 2017

Definition 2

Game theory is a mathematical approach to modeling behavior by analyzing the strategic decisions made by interacting players. Game theory in standard experimental economics operates under the assumption of homo economicus – a self-interested, rational maximizer. Behavioral game theory extends standard (analytical) game theory by taking into account how players feel about the payoffs other players receive, limits in strategic thinking, the influence of context, as well as the effects of learning (Camerer, 2003). Games are usually about cooperation or fairness. Well-known examples include the Prisoner’s Dilemma, Ultimatum Game and Dictator Game (Thaler, 2015).
The Ultimatum Game is an early example of research that uncovered violations of standard assumptions of rationality. In the experiment, one player (the proposer/allocator) is endowed with a sum of money and asked to split it between him/herself and an anonymous player (the responder/recipient). The recipient may either accept the allocator’s proposal or reject it, in which case neither of the players will receive anything. From a traditional game-theoretic perspective, the allocator should only offer a token amount and the recipient should accept it. However, results showed that most allocators offered more than just a token payment, and many went as far as offering an equal split. Some offers were declined by recipients, suggesting that they were willing to make a sacrifice when they felt that the offer was unfair (see also inequity aversion and fairness) (Guth et al., 1982).

Source: Behavioral Economics

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