Introduction to Experimental Games in Behavioral Economics
Behavioral economics seeks to understand how psychological, cognitive, emotional, cultural, and social factors influence economic decision-making. A key methodology in this field is the use of controlled experiments, often employing game theory scenarios. These experimental games allow researchers to observe human behavior in situations that mimic real-world economic interactions, revealing deviations from purely rational economic models.
The Prisoner's Dilemma
The Prisoner's Dilemma is a foundational game in game theory and behavioral economics. It illustrates a situation where two individuals acting in their own self-interest do not produce the optimal outcome. The dilemma arises from the conflict between individual rationality and collective rationality.
Two individuals, each acting selfishly, can lead to a worse outcome for both than if they had cooperated.
Imagine two suspects arrested for a crime. If both remain silent, they get a light sentence. If one betrays the other and the other stays silent, the betrayer goes free, and the silent one gets a harsh sentence. If both betray each other, they both receive a moderate sentence.
In the classic Prisoner's Dilemma, two players independently choose to either 'cooperate' (stay silent) or 'defect' (betray). The payoffs are structured such that:
- If both cooperate, they both receive a moderate reward (e.g., 1 year each).
- If one defects and the other cooperates, the defector receives the highest reward (e.g., 0 years) and the cooperator receives the worst punishment (e.g., 3 years).
- If both defect, they both receive a punishment worse than mutual cooperation but better than being the sole cooperator (e.g., 2 years each). From an individual's perspective, defecting is always the dominant strategy, regardless of what the other player does. However, if both players defect, they both end up worse off than if they had both cooperated.
Defecting is the dominant strategy, as it yields a better outcome for the individual regardless of the other player's choice.
The Ultimatum Game
The Ultimatum Game is a simple yet powerful experimental game that probes fairness and reciprocity. It highlights how people's decisions are influenced by perceptions of justice, even when it means foregoing potential gains.
People reject unfair offers, even if it means receiving nothing.
One player (the proposer) is given a sum of money and must propose how to split it with another player (the responder). The responder can either accept the offer, in which case the money is split as proposed, or reject the offer, in which case neither player receives any money.
In the Ultimatum Game, the proposer decides on a split of a fixed sum (e.g., 5 to the responder and keep 1 and keep 0 should be accepted by the responder, as receiving something is better than receiving nothing. However, experimental results consistently show that responders often reject offers they perceive as unfair, typically those below 20-30% of the total sum. This rejection suggests a concern for fairness and a willingness to punish perceived exploitation, even at a personal cost.
The Ultimatum Game demonstrates that human economic behavior is not solely driven by maximizing monetary gain; fairness and social norms play a significant role.
The Dictator Game
The Dictator Game is a variation of the Ultimatum Game that isolates the decision-making of the proposer. It helps researchers understand the baseline level of altruism or fairness preferences in the absence of strategic considerations by the recipient.
Even without the threat of rejection, many people still share resources.
Similar to the Ultimatum Game, one player (the dictator) is given a sum of money and decides how much to give to another player (the recipient). The recipient has no say in the matter; they simply receive whatever the dictator decides to give.
In the Dictator Game, the dictator is given a sum of money (e.g., 0 to the recipient. However, experiments show that a significant portion of dictators do give some amount to the recipient, demonstrating a degree of altruism or adherence to social norms of sharing, even when there is no strategic incentive to do so.
| Game | Proposer's Action | Responder's Action | Key Insight |
|---|---|---|---|
| Prisoner's Dilemma | Choose to Cooperate or Defect | Choose to Cooperate or Defect | Conflict between individual and collective rationality; tendency to defect. |
| Ultimatum Game | Propose a split of a sum | Accept or Reject the proposed split | Importance of fairness; rejection of unfair offers. |
| Dictator Game | Decide how much to give to another | Passively receive the amount | Baseline altruism/fairness preferences; sharing without coercion. |
Applications and Significance
These experimental games are not just theoretical constructs; they have practical applications in understanding various economic phenomena, from charitable giving and public goods provision to labor negotiations and consumer behavior. By observing how people play these games, economists gain insights into the psychological drivers behind economic decisions, leading to more nuanced and accurate models of human behavior.
Learning Resources
Vernon L. Smith's Nobel lecture, detailing his pioneering work in experimental economics and the use of laboratory markets and games.
A comprehensive survey of behavioral economics, discussing key concepts and experimental findings, including those from game theory.
Detailed explanation of the Ultimatum Game, its variations, experimental results, and theoretical interpretations.
Information on the Dictator Game, its purpose in behavioral economics, and common findings regarding altruism and fairness.
An in-depth philosophical and game-theoretic analysis of the Prisoner's Dilemma, its implications, and paradoxes.
A video lecture introducing the principles and methods of experimental economics, often featuring game theory examples.
A foundational video explaining the core ideas of behavioral economics and how it differs from traditional economics.
Lecture notes from an MIT course on economic reasoning, likely covering experimental games and behavioral concepts.
A TED Talk by Dan Ariely, a prominent behavioral economist, discussing irrationality in decision-making, often illustrated with game examples.
A chapter or overview of experimental game theory, discussing how experiments are used to test game theory predictions and understand human behavior.