Loss aversion in repeated games
(1998)
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- 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.
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Citations
Shalev, J. (1998). Loss aversion in repeated games (CORE Discussion Papers 1998/14). https://hdl.handle.net/2078.5/128086