On Loss Aversion in Bimatrix Games
- 557 Downloads
In this article three different types of loss aversion equilibria in bimatrix games are studied. Loss aversion equilibria are Nash equilibria of games where players are loss averse and where the reference points—points below which they consider payoffs to be losses—are endogenous to the equilibrium calculation. The first type is the fixed point loss aversion equilibrium, introduced in Shalev (2000; Int. J. Game Theory 29(2):269) under the name of ‘myopic loss aversion equilibrium.’ There, the players’ reference points depend on the beliefs about their opponents’ strategies. The second type, the maximin loss aversion equilibrium, differs from the fixed point loss aversion equilibrium in that the reference points are only based on the carriers of the strategies, not on the exact probabilities. In the third type, the safety level loss aversion equilibrium, the reference points depend on the values of the own payoff matrices. Finally, a comparative statics analysis is carried out of all three equilibrium concepts in 2 × 2 bimatrix games. It is established when a player benefits from his opponent falsely believing that he is loss averse.
Keywordsbimatrix games loss aversion reference-dependence
This article is distributed under the terms of the Creative Commons Attribution Noncommercial License which permits any noncommercial use, distribution, and reproduction in any medium, provided the original author(s) and source are credited.
- Camerer C.F. (2002), Prospect theory in the wild: evidence from the field. In: Tversky A., Kahneman D. (eds). Choices, Values, and Frames, chapter 16. Cambridge University Press, pp. 288–301.Google Scholar
- Driesen, B., Perea, A., and Peters, H. (2007), On loss aversion in bimatrix games. METEOR Research Memorandum 07/033, METEOR, Universtiy of Maastricht.Google Scholar
- Machina M.J. (1987). Choice under uncertainty: Problems solved and unsolved. Journal of Economic Perspectives 1(1): 121–154 Google Scholar
- Schoemaker P.J.H. (1982). The expected utility model: Its variants, purposes, evidence and limitations. Journal of Economic Literature, 20(2): 529–563 Google Scholar
- von Neumann, J. and Morgenstern, O. (1944), Theory of Games and Economic Behavior, Princeton University PressGoogle Scholar