Theory and Decision

, Volume 68, Issue 4, pp 367–391 | Cite as

On Loss Aversion in Bimatrix Games

Open Access
Article

Abstract

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.

Keywords

bimatrix games loss aversion reference-dependence 

JEL Classification

C72 

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Copyright information

© The Author(s) 2008

Authors and Affiliations

  1. 1.Department of Quantitative EconomicsUniversity of MaastrichtMaastrichtThe Netherlands

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