13.6 Behavioral Game Theory
We normally assume that managers are rational in the sense that they optimize using all available information. However, they may be subject to psychological biases and may have limited powers of calculation that cause them to act less than fully rationally. Such possibilities are the domain of behavioral economics (Chapters 4 and 9), which seeks to augment the rational economic model so as to better understand and predict economic decision making.
Ultimatum Games
One example of failing to maximize profit occurs in ultimatum games. Businesspeople often face an ultimatum, where one person (the proposer) makes a “take it or leave it” offer to another (the responder). No matter how long the parties have negotiated, once ...
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