Psychological game theory: When emotions enter the equation

As brilliantly visualized in the Disney-Pixar animated film “Inside Out” (2015), emotions drive most if not all of our actions. For a long time, however, economists have not paid much attention to emotions and how they shape our behavior.

The same goes for traditional game theory, which assumes that players’ moves are controlled by a result-dependent utility. To explain more complex motivations, such as reciprocity and guilt, the broader mathematical framework of psychological game theory allows a player’s utility function to depend on the player’s beliefs, including her beliefs about other players’ beliefs. For example, empirical evidence confirms that people are willing to give up some material rewards in order to improve others’ opinion of them.

Psychological game theory makes it possible to account for emotions, such as guilt, disappointment, regret, joy, frustration, anger, fear, shame, fear, etc. It can also model reciprocity (the tendency to answer kindness with kindness), which one of the building blocks of human interactions. Finally, as mentioned, it can address a player’s concerns about what others think of her, a motivation especially present in today’s reputation-oriented society.

After contributing to the development of this branch of game theory over the past 15 years, Pierpaolo Battigalli (Bocconi) and Martin Dufwenberg (University of Arizona) discussed the state of play of psychological game theory in a paper just published in the Economic Literature Magazine.

Psychological game theory lends itself to all kinds of applications, ranging from fashion choices to tax evasion. In the latter setting, for example, shame avoidance can play an important role. In fact, whether tax returns are private or public has been shown to affect citizens’ fairness in this regard. Even the dynamics we’ve seen during the recent pandemic — with many emotions such as fear, anxiety, frustration and anger at play — still represent one of many application areas for psychological game theory.

“I hope”, concludes Professor Battigalli, “that our review can inspire new applications, as well as further theoretical research into some open questions. For example, although emotions are taken into account, all currently available work in psychological game theory assumes that players are rational. Note that emotions do not contrast with rationality. In fact, they are modeled as part of the usefulness of the players in psychological game theory. However, some emotions, such as fear and anger, can hinder rational thinking. The current form of psychological game theory is not equipped to model such effects, but I am convinced that specific applications can pave the way for more extensive modeling.”

Provided by Bocconi University