Implications of Behavioural Game Theory for Neoclassical Economic Theory

Abstract

Behavioural game theory is the application of game theory to the design and interpretation of laboratory experiments. Behavioural game theory aims to determine empirically how individuals make choices under conditions of uncertainty and strategic interaction, and to provide analytical models of the resulting behaviour. It is widely believed that experimental results of behavioural game theory undermine standard economic and game theory. This chapter suggests that experimental results present serious theoretical modelling challenges, but do not undermine a pillar of contemporary economic theory: the rational actor model, which holds that individual choice can be modelled as maximization of an objective function subject to informational and material constraints. However, we must abandon the notion that rationality implies self-regarding behaviour. The most recent stage in behavioural game theory research, rather than treating anomalous behaviour as flowing from faulty reasoning, builds analytical models premised upon the rational actor model, but with agents who systematically exhibit other-regarding preferences, i.e. they care about not only their own payoffs in a strategic interaction, but those of the other players and the process of play as well.

I would like to Samuel Bowles, Ernst Fehr and Jack Hirshleifer for their help and the John D. and Catherine T. MacArthur Foundation for financial support. This essay is dedicated to the memory of Jack Hirshleifer.