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Risk Aversion Pays in the Class of 2 x 2 Games with No Pure Equilibrium

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  • Dirk Engelmann

Abstract

Simulations indicated that, in the class of 2 x 2 games which only have a mixed equilibrium, payoffs are increased by risk aversion compared to risk neutrality. In this paper I show that the total expected payoff to a player over this class in equilibrium is indeed higher if this player is risk averse than if he is risk neutral provided that all games are played with the same probability. Furthermore, I show that for two subclasses of games more risk aversion is always better, while for a third subclass an intermediate level of risk aversion is preferable.

Suggested Citation

  • Dirk Engelmann, 2003. "Risk Aversion Pays in the Class of 2 x 2 Games with No Pure Equilibrium," CERGE-EI Working Papers wp211, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    • Handle: RePEc:cer:papers:wp211
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    File URL: http://www.cerge-ei.cz/pdf/wp/Wp211.pdf
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    References listed on IDEAS

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    1. Ted To, 1999. "Risk and evolution," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 13(2), pages 329-343.
    2. Dekel, Eddie & Scotchmer, Suzanne, 1999. "On the Evolution of Attitudes towards Risk in Winner-Take-All Games," Journal of Economic Theory, Elsevier, vol. 87(1), pages 125-143, July.
    3. Robson, Arthur J., 1996. "The Evolution of Attitudes to Risk: Lottery Tickets and Relative Wealth," Games and Economic Behavior, Elsevier, vol. 14(2), pages 190-207, June.
    4. Robson, Arthur J, 1992. "Status, the Distribution of Wealth, Private and Social Attitudes to Risk," Econometrica, Econometric Society, vol. 60(4), pages 837-857, July.
    5. Robson, Arthur J., 1996. "A Biological Basis for Expected and Non-expected Utility," Journal of Economic Theory, Elsevier, vol. 68(2), pages 397-424, February.
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    Cited by:

    1. Fuhai Hong & Larry Karp, 2014. "International Environmental Agreements with Endogenous or Exogenous Risk," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 1(3), pages 365-394.
    2. Engelmann, Dirk & Steiner, Jakub, 2007. "The effects of risk preferences in mixed-strategy equilibria of 2x2 games," Games and Economic Behavior, Elsevier, vol. 60(2), pages 381-388, August.

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    More about this item

    Keywords

    risk aversion; mixed strategy equilibria;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D89 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Other

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