Abstract: Part I (the first half) of Economics 201C will give an overview of behavioral game theory, an emerging blend of theory and empirical regularities whose goal is to move closer to the kind of understanding of strategic behavior needed to analyze economic, political, and social interactions. An important part of the theory deals with how individual preferences deviate from self-centered maximization in games and other social situations; but in this course I will focus on another part, which is unique to games: how players make decisions whose consequences depend on others' decisions they cannot observe, and must therefore predict. The answer to this question depends on the nature of players' mental models of others' decisions (including others' models of their own decisions). Game theory has approached this question in two very different ways, which coexist (a little too) peacefully in the literature. Traditional game theory assumes players form self-fulfilling beliefs about each other's decisions and make decisions that are optimal given their beliefs, and therefore in Nash equilibrium; in effect it assumes players have perfect mental models. Adaptive learning theories make assumptions directly about how players make and adjust their decisions over time in response to others' decisions; in effect they assume players have simplified mental models. These approaches differ on a cognitive dimension, the sophistication of players' mental models of others' decisions, which I will call strategic sophistication. Behavioral game theory can be viewed as a synthesis of the two approaches, which (among other things) treats the degree of sophistication as an empirical regularity, represented by behavioral parameters, and tries to measure it, usually in laboratory experiments. The course will discuss theories that are helpful in thinking about this issue and examine their performance in the light of experimental evidence. The course will emphasize theory and empirical regularities rather than experimental methods, though some discussion of the methods used in experiments will be needed to interpret their results.

Organization: The course will meet in the first five weeks of Spring quarter, from 9:35-10:55 on Tuesdays and Thursdays in Economics 300. (Part II, Introduction to Contract and Game Theory, will be taught by Joel Watson in the last five weeks.) My office hours will be Wednesdays from 2:00-3:00, but you can also see me by appointment at other times. Students have two enrollment options. Those who just want to hear the lectures should enroll S/U; there will then be no formal requirements. Those who want a grade should enroll for one; they must either take a final exam at a time to be arranged near the end of the first half of the course or write a 7-15 page paper on a topic agreed on with me by the beginning of the third week, due by the beginning of the tenth week. If you are a student who plans to attend the lectures, please enroll either S/U or for a grade (this will help the Department convince the administration that graduate electives are worth offering).

Outline and Readings: There is no formal text. The most important readings are marked with an asterisk (*); readings on reserve are marked with a cross (+). I have listed many more references than we can possibly discuss in the lectures. Useful summaries of much of the material are in:

Colin Camerer, Behavioral Game Theory: Experiments on Strategic Interaction, book manuscript
    (http://www.hss.caltech.edu/CourseSites/Psy101/psy101.html) , and

+Vincent Crawford, "Theory and Experiment in the Analysis of Strategic Interaction," Chapter 7 in David Kreps and Ken Wallis, editors,
    Advances  in Economics and Econometrics: Theory and Applications, Seventh World Congress, Vol. I, Cambridge 1997

Introduction to Behavioral Game Theory
*+Camerer, Chapter 1 (less appendices)
*+Crawford, Sections 1 (pp. 206-208) and 7 (pp. 235-236)
Reinhard Selten, "Features of Experimentally Observed Bounded Rationality," European Economic Review 42 (1998), 413-436

Experimental Methods
*+Camerer, Appendix 2 of Chapter 1
*+Crawford, Section 3 (pp. 215-216)
Alvin Roth, "Introduction to Experimental Economics," Chapter 1 in John Kagel and Alvin Roth, Handbook of Experimental Economics,
    Princeton 1995

Game Theory
*+Camerer, Appendix 1 of Chapter 1
*+Crawford, Section 2 (pp. 208-215)
*Adam Brandenburger, "Knowledge and Equilibrium in Games," Journal of Economic Perspectives 6 (1992), 83-101
    (http://www.jstor.org/jstor/)
Matthew Rabin, "Incorporating Behavioral Assumptions into Game Theory," 69-87 (chapter 4) in James Friedman, editor, Problems of
    Coordination in Economic Activity, Kluwer 1994
Richard McKelvey and Thomas Palfrey, "Quantal Response Equilibria for Normal-Form Games," Games and Economic Behavior 10 (1995),
    6-38 (http://www.idealibrary.com/links/toc/game)
Robert Aumann, "Backward Induction and Common Knowledge of Rationality," Games and Economic Behavior 8 (1995), 6-19
    (http://www.idealibrary.com/links/toc/game)
Richard McKelvey and Thomas Palfrey, "Quantal Response Equilibria for Extensive-Form Games," Experimental Economics 1 (1998), 9-41
Drew Fudenberg and David Levine, The Theory of Learning in Games, MIT 1998

Background reading in game theory:
Avinash Dixit and Susan Skeath, Games of Strategy, Norton, 1999 (elementary, very readable)
Robert Gibbons, "An Introduction to Applicable Game Theory," Journal of Economic Perspectives 11 (1997), 127-149
    (http://www.jstor.org/jstor/); or Robert Gibbons, Game Theory for Applied Economists, Princeton 1992
David Kreps, Game Theory and Economic Modelling, Oxford 1990
David Kreps, A Course in Microeconomic Theory, Princeton 1990, Chapters 11-15
Andreu Mas-Colell, Michael Whinston, and Jerry Green, Microeconomic Theory, Oxford 1995, Chapters 7-9

Experimental Evidence on Initial Responses to Games
1. Simultaneous-move games
a. Iterated dominance and equilibrium
*+Camerer, Chapter 5, "Iterated Reasoning in Dominance-Solvable Games," Sections 1-4.2 (pp. 0-30) and Sections 6-7 (pp. 54-80) (less
    appendix)
*+Crawford, Section 4 (pp. 216-220)
Rosemarie Nagel, "Unraveling in Guessing Games: An Experimental Study," American Economic Review 85 (1995), 1313-1326
    (http://www.jstor.org/jstor/)
Dale Stahl and Paul Wilson, "On Players' Models of Other Players: Theory and Experimental Evidence," Games and Economic Behavior 10,
    (1995), 218-254 (http://www.idealibrary.com/links/toc/game)
Miguel Costa-Gomes, Vincent Crawford, and Bruno Broseta, "Cognition and Behavior in Normal-Form Games: an Experimental Study,"
    Econometrica 69 (2001), in press (http://weber.ucsd.edu/~vcrawfor/2000-02r.pdf )
b. Equilibrium selection and coordination
*Camerer, Chapter 7, "Coordination"
*+Crawford, Section 5 (pp. 220-227)

2. Extensive-Form Games
a. Subgame-perfectness, social utility, and equilibrium
+T. Randolph Beard and Richard Beil, "Do People Rely on the Self-interested Maximization of Others? An Experimental Test," Management
    Science 40 (1994), 252-262
Andrew Schotter, Keith Weigelt, and Charles Wilson, "A Laboratory Investigation of Multiperson Rationality and Presentation Effects," Games
    and Economic Behavior 6 (1994), 445-468 (http://www.idealibrary.com/links/toc/game)
Alvin Roth, Vesna Prasnikar, Masahiro Okuno-Fujiwara, and Shmuel Zamir, "Bargaining and Market Behavior in Jerusalem, Ljubljana, Pittsburgh,
    and Tokyo: An Experimental Study," American Economic Review 81 (1991), 1068-1095 (http://www.jstor.org/jstor/)
Miguel Costa-Gomes and Klaus G. Zauner, "Ultimatum Bargaining Behavior in Israel, Japan, Slovenia, and the United States: A Social Utility
    Analysis," Games and Economic Behavior 34 (2001), 238-269 ( http://www.idealibrary.com/links/toc/game/34/2/0)
+Eric Johnson, Colin Camerer, Sankar Sen, and Talia Rymon, "Detecting Failures of Backward Induction: Monitoring Information Search in
    Sequential Bargaining," manuscript, Columbia School of Business, 2001
Ken Binmore, John McCarthy, Giovanni Ponti, Larry Samuelson, and Avner Shaked, "A Backward Induction Experiment," manuscript, September
    2000. (http://www.ssc.wisc.edu/~larrysam/papers.htm)
b. Refinements, equilibrium selection, and coordination
*Camerer, Chapter 4, "Bargaining" Sections 3.1-3.3 (pp. 12-28)
*+Crawford, Sections 5.1 (pp. 220-221) and 6.3 (p.230)
David Harless and Colin Camerer, "An Error Rate Analysis of Experimental Data Testing Nash Refinements," European Economic Review 39
    (1995), 649-660
+Teck Hua Ho and Keith Weigelt, "Task Complexity, Equilibrium Selection, and Learning: An Experimental Study," Management Science 42
    (1996), 659-679

Experimental Evidence on Adaptive Learning
1. Reinforcement, beliefs-based, and experience-weighted attraction learning
*Camerer, Chapter 2, "Mixed-Strategy Equilibrium Games," and Chapter 6, "Learning"
*+Crawford, Section 6 (pp. 227-235)
Colin Camerer and Teck-Hua Ho, "Experience-weighted Attraction Learning in Normal Form Games," Econometrica, 67 (1999), 827-874
a. Mixed- and pure-strategy equilibrium
Ido Erev and Alvin E. Roth, "Predicting how people play games: Reinforcement Learning in Experimental Games with Unique, Mixed Strategy
    Equilibria," American Economic Review 88 (1998), 848-881 (http://www.economics.harvard.edu/~aroth/papers/AER884.pdf)
Yin-Wong Cheung and Daniel Friedman, "Individual Learning in Normal-Form Games: Some Experimental Results," Games and Economic
    Behavior 19 (1997), 46-76 (http://www.idealibrary.com/links/toc/game)
Jason M. Shachat, "Mixed Strategy Play and the Minimax Hypothesis," UCSD Discussion Paper 96-37
    (ftp://weber.ucsd.edu/pub/econlib/dpapers/ucsd9637.ps.gz)
b. Rule learning and strategic teaching
*Camerer, Chapter 8, "Signaling and Reputation," Section 4.3 (pp. 57-59)
Dale Stahl, "Boundedly Rational Rule Learning in a Guessing Game," Games and Economic Behavior 16 (1996), 303-330
    (http://www.idealibrary.com/links/toc/game)
Teck-Hua Ho, Colin Camerer, and Keith Weigelt, "Iterated Dominance and Iterated Best Response in Experimental 'P-Beauty Contests',"
    American Economic Review 88 (1998), 947-969
Colin Camerer, Teck-Hua Ho, and Juin-Kuan Chong, "Sophisticated EWA Learning and Strategic Teaching in Repeated Games," manuscript,
    Caltech, 2000 (http://fourps.wharton.upenn.edu/ideas/pdf/00-005.pdf)
c. Learning from imperfect analogies
John Van Huyck and Ray Battalio, "Prudence, Justice, Benevolence, & Sex: Evidence from Similar Bargaining Games," manuscript, September
    1999 (http://econlab10.tamu.edu/JVH_gtee/default.htm)
Ray Battalio, F. Rankin, and John Van Huyck, "Strategic Similarity and Emergent Conventions Evidence from Payoff Perturbed Stag Hunt Games,"
    Games and Economic Behavior. 32 (2000), 315-337 (http://www.idealibrary.com/links/toc/game)
Larry Samuelson, "Analogies, Adaptation, and Anomalies," Journal of Economic Theory, in press (http://www.ssc.wisc.edu/~larrysam/papers.htm)
c. Refinements, equilibrium selection, and coordination
Van Huyck, John, Joseph Cook, and Raymond Battalio (1997): "Adaptive Behavior and Coordination Failure," Journal of Economic Behavior
    and Organization 32, 483-503 (http://www.elsevier.nl:80/homepage/sae/econbase/jebo/menu.sht )
+Vincent Crawford, "Learning Dynamics, Lock-in, and Equilibrium Selection in Experimental Coordination Games," in Ugo Pagano and Antonio
    Nicita, editors, The Evolution of Economic Diversity, Routledge, 2001; UCSD Discussion Paper 97-19
    (http://weber.ucsd.edu/~vcrawfor/ucsd9719.pdf or ftp://weber.ucsd.edu/pub/econlib/dpapers/ucsd9719.pdf)
Colin Camerer and Teck-Hua Ho, "Experience-weighted Attraction Learning in Coordination Games" Probability Rules, Heterogeneity, and Time
    Variation," Journal of Mathematical Psychology 42 (1998), 305-326 (http://www.idealibrary.com/links/toc/jmps)

Revised 12 March 2001. Copyright © Vincent P. Crawford, 2001. All federal and state copyrights reserved for all original material presented in this course through any medium.