Abstract
We test the empirical content of the assumption of preference dependent beliefs using a behavioral model of strategic decision making in which the rankings of individuals over final outcomes in simple games influence their beliefs over the opponent’s behavior. This approach— by analogy with Psychological Game Theory—allows for interdependence between preferences and beliefs but reverses the order of causality. We use existing evidence from a multi-stage experiment in which we first elicit distributional preferences in a Random Dictator Game, then estimate beliefs in a related 2×2 effort game conditional on these preferences. Our structural estimations confirm our working hypothesis on how social preferences shape beliefs: subjects with higher guilt (envy) expect others to put less (more) effort, which reduces the expected difference in payoffs.
Highlights
The Subjective Expected Utility (SEU) theory of individual decision making under risk and uncertainty, one of the building blocks of standard game theory, posits that preference and belief formation processes follow two completely distinct cognitive routes
“Belief bias” models consider specific cognitive limitations. These models do not directly link subjective beliefs to individual preferences, to the extent to which the domain of weighting functions is confined to the space of probabilities
Among the various alternatives put forward by the literature, we choose the classic model of social preferences proposed by Fehr and Schmidt [22] (F&S ) and condition our experimental design to the latter, as we explain later
Summary
The Subjective Expected Utility (SEU) theory of individual decision making under risk and uncertainty, one of the building blocks of standard game theory, posits that preference and belief formation processes follow two completely distinct cognitive routes. Within the PGT framework, first and second order beliefs directly impact subjects’ evaluations over the outcomes of interaction This breaks independence between beliefs and preferences, establishing a causal link from the former to the latter, in that decision-makers derive from beliefs (and from beliefs about beliefs) specific feelings and emotions relevant to choice. Among the various alternatives put forward by the literature, we choose the classic model of social preferences proposed by Fehr and Schmidt [22] (F&S ) and condition our experimental design to the latter, as we explain later This model measures two natural emotions when evaluating outcome distributions, guilt (envy), defined as inequity aversion considered from a (dis)advantageous position, respectively.
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