Behavioral Game Theory

1 Description

This course is designed to confront predictions of game theory with experimental evidence. We will attempt to bridge differences between theory and practice, or between normative and positive approaches to strategic behavior. Students will also learn the methodology and practice of experimental economics by designing and running experiments.

1.1 Lectures (2 Hrs / week):

The course will start with the exposition of a range of special topics in experimental economic research. We will go over a varied range of economic experiments that were designed to explore individual and group behavior in economic games.

In a second part, we will discuss the method of experimental economic research, as illustrated by the first part, and we will also cover basic statistical techniques for the analysis of experimental data.

In a third part, participants will have to find a topic for further experimental investigation, develop an experimental design to explore and understand this topic, plan and carry out an experiment based on this design, and present the results obtained orally and in written form.

1.2 Exercises (2 Hrs / week):

In a first part, exercises will consist in taking part in a range of standard economic experiments, examining their design and analyzing the resulting data. In a second part, students will be accompanied in the elaboration of an experimental research question, the design and running of an experiment, and its analysis. In a third part, students will present and discuss their findings.

2 Textbooks

  1. Camerer, C. (2003). Behavioral Game Theory: Experiments in Strategic Interaction. Princeton University Press. (henceforth, “Camerer”)

Additional references:

  1. Friedman, D. & Sunder, S. (1994). Experimental Methods: A Primer for Economists. Cambridge University Press. (for basic principles of experimental methodology)
  2. Gibbons, R. (1992). A primer in game theory. FT Prentice Hall. (for students in need of catching up with game theory)
  3. Moffatt, P. G. (2015). Experimetrics: Econometrics for Experimental Economics. Palgrave. (for advanced econometric analysis of experimental data).
  4. Bardsley, N., Cubitt, R., Moffatt, P., Loomes, G., Starmer, C., & Sugden, R. (2008). Experimental Economics: Rethinking the Rules. Princeton University Press. (for advanced students interested in methodology).

3 Examination (6 Credits)

Individual essay based on group work, in groups of 2-5 people, max 15 pages. Essays can be written in either English or German. The essays requires:

  1. Independent literature research and use of the methods of experimental economic research.
  2. Development of an experimental design and realization of an experiment.
  3. Clear written presentation of the research questions and its theoretical connections.
  4. Evaluation and discussion of the experimental results.

4 Dates & Locations:

Lectures: Tuesday: 14:00 – 16:00, weekly (from 11.04.2017)
Location: ZHG 1.142

Exercises: Wednesday: 16:00 – 18:00, weekly (from 12.04.2017)
Location: MZG 6.115 (Labor)

Essay deadline: 11.08.2017

5 Outline

Part I: Introduction, motivation and examples

Week 1 Organization of the course, topics

Keywords: Methodology and practice of experimental economics, normative and positive approaches to game theory, parametric and non-parametric analysis of experimental data.

References: Chapter 1, Camerer

Lab: Pen and paper experiment, reading of experimental instructions, principles of randomisation, neutrality vs. framing, incentives.

Week 2 The difficulty of predicting game play

Keywords: Quantal response equilibria, risk dominance, payoff dominance, introspection and iterated thinking

References: Goeree, J. K., & Holt, C. A. (2001). Ten Little Treasures of Game Theory and Ten Intuitive Contradictions. The American Economic Review, 91(5), 1402–1422.
McKelvey, R. D., & Palfrey, T. R. (1995). Quantal Response Equilibria for Normal Form Games. Games and Economic Behavior, 10(1), 6–38.

Lab: Presentation and discussion of the results of last week’s experiment.

Part II: Methodology and practice of experimental economics

Week 3 How to run an experiment

Keywords: Treatment, incentives, randomization, deception, framing, instructions

References: Appendix A1.2 in Camerer.
Friedman, D. & Sunder, S. (1994). Experimental Methods: A Primer for Economists. Cambridge University Press.

Lab: Exercises in writing instructions for a choice of different games.

Week 4 How to analyze data from an experiment

Keywords: Parametric and non-parametric statistics, modeling and interpreting errors, hypothesis testing.

References: Chapter 3, Moffatt or any basic textbook in statistics.

Lab: Running analyses of experimental data with the Stata statistical software.

Part III: Theories of behavior in a strategic setting

Week 5 Social preferences

Keywords: Dictator games, altruism, inequality aversion, fairness, trust, reciprocity, guilt-aversion.

References: Chapter 2, Camerer
Berg, J., Dickhaut, J., & McCabe, K. (1995). Trust, Reciprocity, and Social History. Games and Economic Behavior, 10(1), 122–142.
Fehr, E., & Gächter, S. (2000). Fairness and Retaliation: The Economics of Reciprocity. Journal of Economic Perspectives, 14(3), 159–181.
Glaeser, E. L., Laibson, D. I., Scheinkman, J. A., & Soutter, C. L. (2000). Measuring Trust. The Quarterly Journal of Economics, 115(3), 811–846.

Lab: Experimental labor markets, or when fairness generates unemployment
Fehr, E., Kirchsteiger, G., & Riedl, A. (1993). Does Fairness Prevent Market Clearing? An Experimental Investigation. The Quarterly Journal of Economics, 108(2), 437–459.

Week 6 Bargaining and auctions

Keywords: Ultimatum game, double-auction, first and second-price mechanisms

References: Chapter 4, Camerer
Güth, W., Schmittberger, R., & Schwarze, B. (1982). An experimental analysis of ultimatum bargaining. Journal of Economic Behavior & Organization, 3(4), 367–388.
Ketcham, J., Smith, V. L., & Williams, A. W. (1984). A Comparison of Posted-Offer and Double-Auction Pricing Institutions. The Review of Economic Studies, 51(4), 595–614.

Lab: The winner’s curse
Thaler, R. H. (1988). Anomalies: The Winner’s Curse. The Journal of Economic Perspectives, 2(1), 191–202.

Week 7 Mixed strategies

Keywords: Quantal response equilibrium, reinforcement learning

References: Chapter 3, Camerer
Palacios-Huerta, I. (2003). Professionals Play Minimax. The Review of Economic Studies, 70(2), 395–415. (a paper about football penalty kicks!)
Erev, I., & Roth, A. (1998). Predicting How People Play Games: Reinforcement Learning in Experimental Games with Unique, Mixed Strategy Equilibria. The American Economic Review, 88(4), 848–881.

Lab: Testing a range of different incentive schemes and methods for eliciting values and beliefs.

Week 8 Backward induction

Keywords: Iterated dominance, depth of reasoning

References: Chapter 5, Camerer
McKelvey R.D. and T.R. Palfrey (1992): “An Experimental Study of the Centipede Game”, Econometrica, 60(4), pp. 803-836.
Rosenfeld A. (2008): “Pay It Backwards: An Act Of Coffee Kindness”, The Huffington Post, December 23, 2008.

Lab: Beauty contest and centipede game.

Week 9 Coordination

Keywords: Focal points, salience, and other selection devices

References: Chapter 7, Camerer
Sugden, R. (1995). A Theory of Focal Points. The Economic Journal, 105(430), 533–550.
Mehta, J., Starmer, C., & Sugden, R. (1994). The Nature of Salience: An Experimental Investigation of Pure Coordination Games. The American Economic Review, 84(3), 658–673.

Lab: Predicting the behavior of others; experimental tests of focal point theories.

Week 10 Signaling and reputation

Keywords: Repeated games, competition and collusion

References: Chapter 8, Camerer
Milgrom, P., & Roberts, J. (1982). Predation, reputation, and entry deterrence. Journal of Economic Theory, 27(2), 280–312.
Huck, S., Normann, H.-T., & Oechssler, J. (2004). Two are few and four are many: number effects in experimental oligopolies. Journal of Economic Behavior & Organization, 53(4), 435–446.

Lab: Competition in Bertrand and Cournot markets.

Week 11 Learning to play a game

Keywords: Trial and error, myopic best response, reinforcement learning, imitation, fictitious play

References: Chapter 6, Camerer
Offerman, T., Potters, J., & Sonnemans, J. (2002). Imitation and belief learning in an oligopoly experiment. The Review of Economic Studies, 69(4), 973–997.

Lab: What do experimental subjects actually understand about the games they are asked to play?
Fehr, D., & Huck, S. (2016). Who knows it is a game? On strategic awareness and cognitive ability. Experimental Economics, 19(4), 713–726.
Güth, W. (2014). Observing Mental Modeling — Methods and Results. Review of Behavioral Economics, 1(1–2), 99–114.

Weeks 12-14

Devoted to group presentations of experimental projects and the running of group experiments in the lab