Game Theory and Psychology

Abstract

Game theory is a branch of decision theory focusing on interactive decisions, applicable whenever the actions of two or more decision makers jointly determine an outcome that affects them all. Strategic reasoning amounts to deciding how to act to achieve a desired objective, taking into account how others will act and the fact that they will also reason strategically. The primitive concepts of the theory are players (decision makers), strategies (alternatives among which each player chooses), and payoffs (numerical representations of the players’ preferences among the possible outcomes of the game). The theory’s fundamental assumptions are (i) that all players have consistent preferences and are instrumentally rational in the sense of invariably choosing an alternative that maximizes their individual payoffs, relative to their knowledge and beliefs at the time; and (ii) that the specification of the game and the players’ preferences and rationality are common knowledge among the players (explained below under Common Knowledge). Game theory amounts to working out the implications of these assumptions in particular classes of games and thereby determining how rational players will act. Psychology is the study of the nature, functions, and phenomena of behavior and mental experience, and two branches of psychology provide bridges to and from game theory: cognitive psychology, concerned with all forms of cognition, including decision making, and social psychology, concerned with how individual behavior and mental experience are influenced by other people. Psychology uses empirical research methods, including controlled experiments, and its usefulness for studying games emerges from three considerations. First, many games turn out to lack determinate game-theoretic solutions, and psychological theories and empirical evidence are therefore required to discover and understand how people play them and how they behave in real-life social interactions with the corresponding strategic structures. Second, human decision makers have bounded rationality and are rarely blessed with full common knowledge; consequently, except in the simplest cases, they do not necessarily choose strategies that maximize their payoffs even when determinate game-theoretic solutions exist. Third, human decision makers have other-regarding preferences and sometimes do not even try to maximize their personal payoffs, without regard to the payoffs of others, and psychological theory and empirical research are therefore required to provide a realistic account of strategic interactions. Psychology has investigated strategic interaction since the 1950s; behavioral game theory, a branch of the emergent subdiscipline of behavioral economics, has used similar techniques since the late 1980s, although a small number of early examples of experimental economics can be traced back to the 1940s.