Game theory is central to understanding the dynamics of life forms in general, and humans in particular. Living creatures not only play games but also dynamically transform the games they play and have thereby evolved their unique identities. For this reason, the material in this book is foundational to all the behavioral sciences, from biology, psychology, and economics to anthropology, sociology, and political science. Disciplines that slight game theory are the worse—indeed, much worse—for it.

We humans have a completely stunning capacity to reason and to apply the fruits of reason to the transformation of our social existence. Social interactions in a vast array of species can be analyzed with game theory, yet only humans are capable of playing a game after being told its rules. This book is based on the appreciation that evolution and reason interact in constituting the social life and strategic interaction of humans.

Game theory, however, is not everything. This book systematically refutes one of the guiding prejudices of contemporary game theory. This is the notion that game theory is, insofar as human beings are rational, sufficient to explain all of human social existence. In fact, game theory is complementary to ideas developed and championed in all the behavioral disciplines. Behavioral scientists who have rejected game theory in reaction to the extravagant claims of some of its adherents may thus want to reconsider their positions, recognizing the fact that, just as game theory without broader social theory is merely technical bravado, so social theory without game theory is a handicapped enterprise.

The reigning culture in game theory asserts the sufficiency of game theory, allowing game theorists to do social theory without regard for either the facts or the theoretical contributions of the other social sciences. Only the feudal structure of the behavioral disciplines could possibly permit the persistence of such a manifestly absurd notion in a group of intelligent and open-minded scientists. Game theorists act like the proverbial “man with a hammer” for whom “all problems look like nails.” I have explicitly started this volume with a broad array of social facts drawn from behavioral decision theory and behavioral game theory to disabuse the reader of this crippling notion. Game theory is a wonderful hammer, indeed a magical hammer. But, it is only a hammer and not the only occupant of the social scientist’s toolbox.

The most fundamental failure of game theory is its lack of a theory of when and how rational agents share mental constructs. The assumption that humans are rational is an excellent first approximation. But, the Bayesian rational actors favored by contemporary game theory live in a universe of subjectivity and instead of constructing a truly social epistemology, game theorists have developed a variety of subterfuges that make it appear that rational agents may enjoy a commonality of belief (common priors, common knowledge), but all are failures. Humans have a social epistemology, meaning that we have reasoning processes that afford us forms of knowledge and understanding, especially the understanding and sharing of the content of other minds, that are unavailable to merely “rational” creatures. This social epistemology characterizes our species. The bounds of reason are thus not the irrational, but the social….

The eternal mystery of the world is its comprehensibility.

Albert Einstein

### Contents

Preface

**I. Decision Theory and Human Behavior **

- Beliefs, Preferences, and Constraints
- The Meaning of Rational Action
- Why Are Preferences Consistent?
- Time Inconsistency
- Bayesian Rationality and Subjective Priors
- The Biological Basis for Expected Utility
- The Allais and Ellsberg Paradoxes
- Risk and the Shape of the Utility Function
- Prospect Theory
- Heuristics and Biases in Decision Making

**II. Game Theory: Basic Concepts **

- The Extensive Form
- The Normal Form
- Mixed Strategies
- Nash Equilibrium
- The Fundamental Theorem of Game Theory
- Solving for Mixed-Strategy Nash Equilibria
- Throwing Fingers
- The Battle of the Sexes
- The Hawk-Dove Game
- The Prisoner’s Dilemma
- Alice, Bob, and the Choreographer
- An Efficiency-Enhancing Choreographer
- The Correlated Equilibrium Solution Concept

**III. Game Theory and Human Behavior**

- Self- and Other-Regarding Preferences
- Methodological Issues in Behavioral Game Theory
- An Anonymous Market Exchange
- The Rationality of Altruistic Giving
- Conditional Altruistic Cooperation
- Altruistic Punishment
- Strong Reciprocity in the Labor Market
- Altruistic Third-Party Punishment
- Altruism and Cooperation in Groups
- Inequality Aversion
- The Trust Game
- Character Virtues
- The Situational Character of Preferences
- The Dark Side of Altruistic Cooperation
- Norms of Cooperation: Cross-Cultural Variation

**IV. Rationalizability and Common Knowledge of Rationality **

- Epistemic Games
- A Simple Epistemic Game
- An Epistemic Battle of the Sexes
- Dominated and Iteratedly Dominated Strategies
- Eliminating Weakly Dominated Strategies
- Rationalizable Strategies
- Eliminating Strongly Dominated Strategies
- Common Knowledge of Rationality
- Rationalizability and Common Knowledge of Rationality
- The Beauty Contest
- The Traveler’s Dilemma
- The Modified Traveler’s Dilemma
- Global Games
- CKR Is an Event, Not a Premise

**V. Extensive Form Rationalizability**

- Backward Induction and Dominated Strategies
- Subgame Perfection
- Subgame Perfection and Incredible Threats
- The Surprise Examination
- The Common Knowledge of Logicality Paradox
- The Repeated Prisoner’s Dilemma
- The Centipede Game
- CKR Fails Off the Backward Induction Path
- How to Play the Repeated Prisoner’s Dilemma
- The Modal Logic of Knowledge
- Backward Induction and Extensive Form CKR
- Rationality and Extensive Form CKR
- On the Nonexistence of CKR

**VI. The Mixing Problem: Purification and Conjectures**

- Why Play Mixed Strategies?
- Harsanyi’s Purification Theorem
- A Reputational Model of Honesty and Corruption
- Purifying Honesty and Corruption
- Epistemic Games: Mixed Strategies as Conjectures
- Resurrecting the Conjecture Approach to Purification

**VII. Bayesian Rationality and Social Epistemology**

- The Sexes: From Battle to Ballet
- The Choreographer Trumps Backward Induction
- Property Rights and Correlated Equilibrium
- Convention as Correlated Equilibrium
- Correlated Strategies and Correlated Equilibria
- Correlated Equilibrium and Bayesian Rationality
- The Social Epistemology of Common Priors
- The Social Epistemology of Common Knowledge
- Social Norms
- Game Theory and the Evolution of Norms
- The Merchants’ Wares

**VIII. Common Knowledge and Nash Equilibrium**

- Conditions for a Nash Equilibrium in Two-Player Games
- A Three-Player Counterexample
- The Modal Logic of Common Knowledge
- The Commonality of Knowledge
- The Tactful Ladies
- The Tactful Ladies and the Commonality of Knowledge
- Agreeing to Disagree
- The Demise of Methodological Individualism

**IX. Reflective Reason and Equilibrium Refinements**

- Perfect, Perfect Bayesian, and Sequential Equilibria
- Incredible Threats
- Unreasonable Perfect Bayesian Equilibria
- The LBR criterion picks out the sequential equilibrium
- Selten’s Horse: Sequentiality vs. the LBR criterion
- The Spence Signaling Model
- Irrelevant Node Additions
- Improper Sequential Equilibria
- Second-Order Forward Induction
- Beer and Quiche Without the Intuitive Criterion
- An Unreasonable Perfect Equilibrium
- The Principle of Insufficient Reason
- The Principle of Honest Communication
- Induction: Forward is Robust, Backward is Fragile

**X. The Analytics of Human Sociality**

- Explaining Cooperation: An Overview
- Bob and Alice Redux
- The Folk Theorem
- The Folk Theorem with Imperfect Public Information
- Cooperation with Private Signaling
- One Cheer For the Folk Theorem
- Altruistic Punishing in the Public Goods Game
- The Failure of Models of Self-Regarding Cooperation

**XI. The Evolution of Property Rights **

- The Endowment Effect
- Territoriality
- Property Rights in Young Children
- Respect for Possession in Nonhuman Animals
- Conditions for a Property Equilibrium
- Property and Antiproperty Equilibria
- An Antiproperty Equilibrium
- Property Rights as Choreographer

**XII. The Unification of the Behavioral Sciences**

- Gene-Culture Coevolution: The Biological Model
- Culture and Physiology of Human Communication
- Biological and Cultural Dynamics
- The Theory of Norms: The Sociological Model
- Socialization and the Internalization of Norms
- Rational Choice: The Economic Model
- Deliberative Choice: The Psychological Model
- Application: Addictive Behavior
- Game Theory: The Universal Lexicon of Life
- Epistemic Game Theory and Social Norms
- Society as a Complex Adaptive System
- Counterpoint: Biology
- Counterpoint: Economics
- Counterpoint: Psychology
- The Behavioral Disciplines Can Be Unified

Summary

Table of Symbols

References

Index

Language: English

Format: PDF

Pages: 305

Size: 1.97 Mb

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