Volume 17, Issue 3

We summarize the career of Reinhard Selten, who received the Nobel Prize in Economics in 1994. We underline his contributions to several domains of the theory of games, to the study of bounded rationality and to the methodology of experimental economics. We finally present the papers in this special issue in honor of his 85th birthday.

In a recent paper, Croson et al. (2015) experimentally study three weakest link games with multiple symmetric equilibria. They demonstrate that static concepts based on the Nash equilibrium (including multiple Nash equilibria, quantal response equilibria, and equilibrium selection by risk and payoff dominance) cannot successfully capture the observed treatment differences. Using Reinhard Selten’s impulse response dynamics, we derive a proposition that provides a theoretical ranking of contribution levels in the weakest link games. We show that the predicted ranking of treatment outcomes is fully consistent with the observed data. In addition, we demonstrate that the impulse response dynamics perform well in tracking average contributions over time. We conclude that Reinhard Selten’s impulse response dynamics provide an extremely valuable behavioral approach that is not only capable of resolving the indecisiveness of static approaches in games with many equilibria, but that can also be used to track the development of choices over time in games with repeated interaction.

One of the most well-known descriptive bargaining models is Raiffa’s Zone of Possible Agreements (ZOPA). We reinterpret Raiffa’s model of a price negotiation in the realm of bounded rationality by applying Simon’s theory of Satisficing. Afterward we refine Raiffa’s negotiation model using Aspiration Adaptation Theory as suggested by Sauermann, Selten, Tietz and others. We offer a model of a concession process that gives precision to the Dance of Concessions in Raiffa’s model by applying axioms of bounded rationality. Raiffa suggests a solution point derived from equity in price dimension, whereas we propose an area solution defined by equity in aspiration levels.

Considerable experimental evidence has been collected on rules enhancing contributions in public goods dilemmas. These studies either confront subjects with prespecified rules or have subjects choose between different rule environments. In this paper, we completely endogenize the institution design process by asking subjects to design and repeatedly improve rule sets for a public goods problem in order to investigate which rules social planners facing a social dilemma ‘invent’ and how these rules develop over time. We make several noteworthy observations, in particular the strong and successful use of framing, the concealment of individual contribution information and the decreasing use of punishment.

We analyze how transparency affects information acquisition in a bargaining context where proposers may choose to purchase information about the unknown outside options of their bargaining partners. Although information acquisition is excessive in all scenarios, we find that bargaining outcomes depend crucially on the transparency of the bargaining environment. In transparent games, when responders can observe whether proposers have acquired information, acceptance rates are higher. Accordingly, in transparent bargaining environments, information is more valuable, both individually and socially.

We study how subjects in an experiment use different forms of public information about their opponents’ past behavior. In the absence of public information, subjects appear to use rather detailed statistics summarizing their private experiences. If they have additional public information, they make use of this information even if it is less precise than their own private statistics - except for very high stakes. Making public information more precise has two consequences: It is also used when the stakes are very high and it reduces the number of subjects who ignore any information - public and private. That is, precise public information crowds in the use of own information. Finally, our results shed some light on unraveling in centipede games.

We report the experimental results on a game with an outside option where forward induction contradicts with backward induction based on a focal, risk dominant equilibrium. The latter procedure yields the equilibrium selected by Harsanyi and Selten’s (1988) theory, which is hence here in contradiction with strategic stability (Kohlberg and Mertens, 1986). We find the Harsanyi-Selten solution to be in much better agreement with our data. Since fairness and bounded rationality seem to matter we discuss whether recent behavioral theories, in particular fairness theories and learning, might explain our findings. The fairness theories by Bolton and Ockenfels (2000), Charness and Rabin (2002), or Fehr and Schmidt (1999), when calibrated using experimental data on dictator- and ultimatum games, indeed predict that forward induction should play no role for our experiment and that the outside option should be chosen by all sufficiently selfish players. However, there is a multiplicity of ‘fairness equilibria’, some of which seem to be rejected because they require too many levels of reasoning. We show that learning theories based on naive priors could alternatively explain our results, but not that of closely related experiments.

We demonstrate that people are more willing to take risks in a stag hunt game when the agent of uncertainty is another person, thereby promoting cooperation. Recent social cognition research suggests an explanation for this pattern, which is based on the idea that games that align interests between subjects activate a trust mindset.