Abstract
Experiments on bargaining games have repeatedly shown that subjects fail to use backward induction, and that they only rarely make demands in accordance with the subgame perfect equilibrium. In a recent paper, we proposed an alternative model, termed ‘economic harmony’ in which we modified the individual's utility by defining it as a function of the ratio between the actual and aspired pay-offs. We also abandoned the notion of equilibrium, in favour of a new notion of ‘harmony’, defined as the intersection of strategies, at which all players are equally satisfied. We showed that the proposed model yields excellent predictions of offers in the ultimatum game, and requests in the sequential common pool resource dilemma game. Strikingly, the predicted demand in the ultimatum game is equal to the famous Golden Ratio (approx. 0.62 of the entire pie). The same prediction was recently derived independently by Schuster (Schuster 2017. Sci. Rep. 7, 5642). In this paper, we extend the solution to bargaining games with alternating offers. We show that the derived solution predicts the opening demands reported in several experiments, on games with equal and unequal discount factors and game horizons. Our solution also predicts several unexplained findings, including the puzzling ‘disadvantageous counter-offers’, and the insensitivity of opening demands to variations in the players' discount factors, and game horizon. Strikingly, we find that the predicted opening demand in the alternating offers game is also equal to the Golden Ratio.
Highlights
Thirty-five years of experimental testing of non-cooperative bargaining theory have repeatedly shown that human subjects2018 The Authors
The proposed approach, referred to as economic harmony (EH) theory, differs from standard game theory in two meaningful aspects: (i) it modifies the utility function by introducing an epistemic factor pertaining to the individual’s aspiration level, which depends on the game structure and the player’s position in it; and (ii) it abandons the view that bargaining interactions will settle, sooner or later, at an subgame perfect equilibrium (SPE), in favour of the view that interactions will eventually settle at a point at which all the interacting parties are satisfied or happy
In a recent paper [41], we showed that the proposed theory yields excellent predictions of the offers observed in ultimatum bargaining and the requests in the sequential common pool resource (CPR) dilemma game
Summary
ERC predicts that the proposer should offer any amount that is larger than zero and less than or equal to 50% of the entire amount, while IA’s prediction is non-specific, as it requires an estimation of the players’ utility functions, which is not an easy and reliable task Both theories are strongly refuted by a three-person ultimatum game designed to test their predictions [24]. The proposed approach, referred to as EH theory, differs from standard game theory in two meaningful aspects: (i) it modifies the utility function by introducing an epistemic factor pertaining to the individual’s aspiration level, which depends on the game structure and the player’s position in it; and (ii) it abandons the view that bargaining interactions will settle, sooner or later, at an SPE, in favour of the view that interactions will eventually settle at a point at which all the interacting parties are satisfied or happy.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
