Behavioural Game Theory : Thinking , Learning and Teaching

Game theory is a mathematical system for analysing and predicting how humans behave in strategic situations. Standard equilibrium analyses assume that all players: (I) form beliefs based on an analysis of what others might do (strategic thinking); (2) choose the best response given those beliefs (optimization); and (3) adjust best responses and beliefs until they are mutually consistent (equilibrium). It is widely accepted that not every player behaves rationally in complex situations, so assumptions (I ) and (2) are sometimes violated. For explain ing consumer choices and other decisions, rationality may still be an adequate approximat ion even if a modest percentage of players violate the theory. But game theory is different : the players' fates are intertwined . The presence of players who do not th ink strateg ically o r optimize, even if there are very few such players, can change wha t rational players should do. As a result, what a population of players is likely to do when some are not thinking stra tegically and optimizing can only be predicted by an analysis that uses the tools of (1)-(3) but accounts for bounded rationality as well, preferably in a precise way.' An alternative way to define the equilibrium condition (3) is that players are never surprised when the strategies of other players are revealed. Defined

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