Risk Averse Behavior in Asymmetric Matching Pennies Games

Jacob K. Goeree · Charles A. Holt · Thomas Rossman Palfrey

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Experimental Behavioral Economics Studies Decision-Making and Behavioral Economics Game Theory and Applications

Abstract

. This paper studies several variants of 2 2 games with unique mixed strategy equilibria, which we call asymmetric matching pennies games. In experimental studies of behavior in these games, observed choice frequencies are typically much different from the mixed strategy Nash equilibrium. This paper reports experimental results for a variety of such games, and shows that a structural econometric model which incorporates risk aversion into a quantal response equilibrium explains the data very well. Moreover, risk aversion estimates are stable across the different games and are close to those obtained from laboratory and field auction data, as well as from individual lottery choice experiments. Our approach also provides a simple and powerful test of a model of inequity aversion (Fehr and Schmidt, 1999). This model does not predict as well by itself, and the inequity parameter estimates are insignificant in a nested model with risk aversion. Keywords: game theory, matching pennies, Nash...

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1988Prospect theory: An analysis of decision under risk 1999A Theory of Fairness, Competition, and Cooperation 1995Quantal Response Equilibria for Normal Form Games 1962Individual Choice Behavior 1998The Probability Weighting Function 1998Predicting How People Play Games: Reinforcement Learning in Experimental Games with Unique, Mixed Strategy Equilibria 1980Attitudes Toward Risk: Experimental Measurement in Rural India 1999Experience-weighted Attraction Learning in Normal Form Games

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