Behavioral game theory seeks to examine how people's strategic decision-making behavior is shaped by social preferences, social utility and other psychological factors. Behavioral game theory analyzes interactive strategic decisions and behavior using the methods of game theory, experimental economics, and experimental psychology. Experiments include testing deviations from typical simplifications of economic theory such as the independence axiom and neglect of altruism, fairness, and framing effects. As a research program, the subject is a development of the last three decades.
Traditional game theory is a critical principle of economic theory, and assumes that people's strategic decisions are shaped by rationality, selfishness and utility maximisation. It focuses on the mathematical structure of equilibria, and tends to use basic rational choice theory and utility maximization as the primary principles within economic models. At the same time rational choice theory is an ideal model that assumes that individuals will actively choose the option with the greatest benefit. The fact is that consumers have different preferences and rational choice theory is not accurate in its assumptions about consumer behavior. In contrast to traditional game theory, behavioral game theory examines how actual human behavior tends to deviate from standard predictions and models. In order to more accurately understand these deviations and determine the factors and conditions involved in strategic decision making, behavioral game theory aims to create new models that incorporate psychological principles. Studies of behavioral game theory demonstrate that choices are not always rational and do not always represent the utility maximizing choice.
Behavioral game theory largely utilizes empirical and theoretical research to understand human behavior. It also uses laboratory and field experiments, as well as modeling – both theoretical and computational. Recently, methods from machine learning have been applied in work at the intersection of economics, psychology, and computer science to improve both prediction and understanding of behavior in games.
History
Behavioral game theory began with the work of Allais in 1953 and Ellsberg in 1961. They discovered the Allais paradox and the Ellsberg paradox, respectively. Both paradoxes show that choices made by participants in a game do not reflect the benefit they expect to receive from making those choices. In 1956, the work of Vernon Smith showed that economic markets could be examined experimentally rather than only theoretically, and reinforced the importance of rationality and self-interest within economic models. According to rational choice theory, consumers' behavior depends on three reasons. The first reason is that the degree of emotional pleasure consumers derive from their purchases depends on their preferences. The second reason is that consumers do not have enough choices. The third reason is that consumers derive greater pleasure from a limited number of choices. Later in the 1970's, economists Tversky and Kahneman, as well as several other co-workers, conducted experiments that discovered variations of traditional decision-making models such as regret theory, prospect theory, and hyperbolic discounting. These discoveries showed that decision makers consider many factors when making choices. For example, a person may seek to minimize the amount of regret they will feel after making a decision and weigh their options based on the amount of regret they anticipate from each. Due to the fact that these theories were not previously examined by traditional economic theory, factors such as regret along with many others fueled further research on the subject of social preferences and decision making.