13.4 Behavioral Game Theory

We normally assume that people 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 causes them to act irrationally, as described in the Application “Bidder’s Curse.” Such possibilities are the domain of behavioral economics (Chapters 3 and 11), which seeks to augment the rational economic model so as to better understand and predict economic decision-making.

Another example of nonoptimal strategies occurs in ultimatum games. People 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, ...

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