Empirical Evidence Against Neoclassical Utility Theory

1.2 Resentment, Revenge, Gratitude, Carelessness

The goal of this section is to show that all of these human emotions MATTER in the analysis of the very simple game shown below. It also shows that economists simplification to utility actually creates blinders which are obstacles to understanding the reality of human behavior in games:

Empirical evidence cited below about this two player game is discussed in Goeree and Holt (2001). Initially, assume that x<2, so that $(3+x) < $5. At the first move, Player I (P1), Adam has the option of ending the game and getting the safe option of $7, by playing RIGHT. Alternatively, he can choose to play LEFT, which puts Ben on the move. Ben gets $3+x<$5 if he moves L, and he gets the higher payoff $5 if he moves R. The standard game theoretic analysis of this game provides us with the following insights:

1. At Node labelled (P2:Ben), utility maximization predicts Ben will choose to play R, which gives him the higher payoff $5 > $ (3+x). This implies that Adam will receive $10.
2. Adam can rely on economic theory, which states that Ben will choose R over L, as long as $5 > $ (3+x). This means that Adam can rely on receiving $10, if he puts Ben on the move by playing LEFT.
3. A rational and selfish Adam will play LEFT, since that leads to an outcome of $10, while RIGHT leads only to $7.
4. The value of B, which Ben gets if Adam plays RIGHT, is irrelevant.

All four of these insights are wrong. Furthermore, ordinary untrained subjects who play this game behave in ways which show deeper understanding of human behavior. Thus game theory systematically handicaps the understanding of actual observed behavior in this game.

Experimental evidence reveals the following patterns of behavior:

1. When the difference between $3+x and $5 is small, Adam cannot rely on Ben making the right move. Suppose 3+x =4.75, which is only a bit smaller than $5. In one experiment, 15% of the second players choose L, which gives them a quarter less than the optimal move R. This “mistake” substantially reduces the payoff to Adam. Anticipating this possibility, many player I’s chose to take the safe payoff of $7 by moving RIGHT.
2. As the difference between 3+x and 5 increases, the chances of player II playing R increase. In experiments, Player I anticipates this and chooses LEFT more often. None of these phenomena is predicted by game theory, showing the theory is blind to aspects of the game which untrained observers are aware off.
3. A high value of B creates resentment in player II. For example if B=$10, the LEFT by player I reduces the payoff of player II to a choice between $3+x and $5. This could easily motivate player II to take revenge by playing L and punish player I. Anticipating this, player I takes the secure option of RIGHT very often in this situation. Again this behavior shows greater wisdom than game theory.

Critiques of Economic Theories — More general collection of critiques of economic theory

Unlearning Economics — How to remove prejudices against facts created by economic theory.