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Loss Aversion in Repeated Games

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  • Jonathan Shalev

    (CORE)

Abstract

The Nash equilibrium solution concept for strategic form games is based on the assumption of expected utility maximization. Reference dependent utility functions (in which utility is determined not only by an outcome, but also by the relationship of the outcome to a reference point) are a better predictor of behavior than expected utility. In a repeated situation, the value of the previous payoff is a natural reference point for evaluating each period's payoff, and loss aversion implies that decreases are treated more severely than increases. We characterize the equilibria of infinitely repeated games for the case of extreme loss aversion, and show how these are related to the equilibria of stochastic games with state-independent transitions.

Suggested Citation

  • Jonathan Shalev, 1998. "Loss Aversion in Repeated Games," Game Theory and Information 9802005, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpga:9802005
    Note: Type of Document - LaTeX; prepared on IBM PC ; to print on PostScript; pages: 22 ; figures: included
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    1. MERTENS , Jean-François & SORIN , Sylvain & ZAMIR , Shmuel, 1994. "Repeated Games. Part B : The Central Results," LIDAM Discussion Papers CORE 1994021, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    2. Ferreira J. -L. & Gilboa I. & Maschler M., 1995. "Credible Equilibria in Games with Utilities Changing during the Play," Games and Economic Behavior, Elsevier, vol. 10(2), pages 284-317, August.
    3. Shalev, Jonathan, 1997. "Loss aversion in a multi-period model," Mathematical Social Sciences, Elsevier, vol. 33(3), pages 203-226, June.
    4. Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
    5. Amos Tversky & Daniel Kahneman, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(4), pages 1039-1061.
    6. Jonathan Shalev, 2000. "Loss aversion equilibrium," International Journal of Game Theory, Springer;Game Theory Society, vol. 29(2), pages 269-287.
    7. MERTENS , Jean-François & SORIN , Sylvain & ZAMIR , Shmuel, 1994. "Repeated Games. Part A : Background Material," LIDAM Discussion Papers CORE 1994020, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    8. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    9. Gilboa, Itzhak, 1989. "Expectation and Variation in Multi-period Decisions," Econometrica, Econometric Society, vol. 57(5), pages 1153-1169, September.
    10. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard H, 1990. "Experimental Tests of the Endowment Effect and the Coase Theorem," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1325-1348, December.
    11. Daniel Kahneman & Jack L. Knetsch & Richard H. Thaler, 1991. "Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 193-206, Winter.
    12. MERTENS, Jean-François & SORIN , Sylvain & ZAMIR , Shmuel, 1994. "Repeated Games. Part C : Further Developments," LIDAM Discussion Papers CORE 1994022, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    13. Rabin, Matthew, 1993. "Incorporating Fairness into Game Theory and Economics," American Economic Review, American Economic Association, vol. 83(5), pages 1281-1302, December.
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    Cited by:

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    More about this item

    Keywords

    loss aversion repeated games reference dependence prospect theory;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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