Cooperation as a Result of Learning with Aspiration Levels

It is shown that a win-stay, lose-hift behavior rule with endogenous aspiration levels yields cooperation in a certain class of games. The aspiration level in each round equals the current population average. The class of games includes the prisoner's dilemma and Cournot oligopoly and thus yields an explanation for cooperation and collusion.cooperation

Herding and Contrarian Behavior in Financial Markets - An Internet Experiment

We report results of an internet experiment designed to test the theory of informational cascades in financial markets. More than 6000 subjects, including a subsample of 267 consultants from an international consulting firm, participated in the experiment. As predicted by theory, we find that the presence of a flexible market price prevents herding. However, the presence of contrarian behavior, which can (partly) be rationalized via error models, distorts prices, and even after 20 decisions convergence to the fundamental value is rare. We also study the effects of transaction costs and the expectations of subjects with respect to future prices. Finally, we look at the behavior of various subsamples of our heterogeneous subject poolHerding, informational cascades, contrarian behavior, internet experiment

The Limited Liability Effect in Experimental Duopoly Markets

Brander and Lewis argue in a seminal paper (AER, 1986) that a firm's debt-equity ratio should have important strategic effects on product market competition. We test their model in a duopoly experiment under both, Bertrand and Cournot competition. We find that leverage has strategic effects, but those effects are much weaker than predicted by theory. Specifically, we find for price competition a general tendency towards collusion, which has the same overall consequences - but deviates from - the subgame perfect equilibrium prediction. With quantity competition subjects choose much less debt than predicted by theory. It appears that subjects recognize the strategic effects of their own debt. However, they do not (want to) acknowledge possible strategic advantages of opponents' debt.oligopoly, bankruptcy, debt-equity ratio

Brown-von Neumann-Nash Dynamics: The Continuous Strategy Case

In John Nash’s proofs for the existence of (Nash) equilibria based on Brouwer’s theorem, an iteration mapping is used. A continuous- time analogue of the same mapping has been studied even earlier by Brown and von Neumann. This differential equation has recently been suggested as a plausible boundedly rational learning process in games. In the current paper we study this Brown-von Neumann-Nash dynamics for the case of continuous strategy spaces. We show that for continuous payoff functions, the set of rest points of the dynamics coincides with the set of Nash equilibria of the underlying game. We also study the asymptotic stability properties of rest points. While strict Nash equilibria may be unstable, we identify sufficient conditions for local and global asymptotic stability which use concepts developed in evolutionary game theory.learning in games, evolutionary stability, BNN

On the Dynamic Foundation of Evolutionary Stability in Continuous Models

We show in this paper that none of the existing static evolutionary stability concepts (ESS, CSS, uninvadability, NIS) is sufficient to guarantee dynamic stability in the weak topology with respect to standard evolutionary dynamics if the strategy space is continuous. We propose a new concept, evolutionary robustness, which is stronger than the previous concepts. Evolutionary robustness ensures dynamic stability for replicator dynamics in doubly symmetric games.replicator dynamics, evolutionary stability, ESS, CSS

Finitely repeated games with social preferences

A well—known result from the theory of finitely repeated games states that if the stage game has a unique equilibrium, then there is a unique subgame perfect equilibrium in the finitely repeated game in which the equilibrium of the stage game is being played in every period. Here I show that this result does in general not hold anymore if players have social preferences of the form frequently assumed in the recent literature, for example in the inequity aversion models of Fehr and Schmidt (1999) or Bolton and Ockenfels (2000). In fact, repeating the unique stage game equilibrium may not be a subgame perfect equilibrium at all

Incentives for Subjects in Internet Experiments

Internet experiments are a new and convenient way for reaching a large subject pool. Yet, providing incentives to subjects can be a tricky design issue. One cost effective and simple method is the publication of a high score (as in computer games). We test whether a high score provides adequate and non-distortionary incentives by comparing it to the usual performance based incentives. We find significant differences and conclude that high scores are not always appropriate as an incentive device. Performance based financial incentives seem to be required also in internet experiments.incentives, internet, experiments, high score,incentives, internet, experiments, high score

Imitation - Theory and Experimental Evidence

We introduce a generalized theoretical approach to study imitation and subject it to rigorous experimental testing. In our theoretical analysis we find that the different predictions of previous imitation models are due to different informational assumptions, not to different behavioral rules. It is more important whom one imitates rather than how. In a laboratory experiment we test the different theories by systematically varying information conditions. We find significant effects of seemingly innocent changes in information. Moreover, the generalized imitation model predicts the differences between treatments well. The data provide support for imitation on the individual level, both in terms of choice and in terms of perception. But imitation is not unconditional. Rather individuals' propensity to imitate more successful actions is increasing in payoff differences