PAYOFF LEVELS, LOSS AVOIDANCE, AND EQUILIBRIUM SELECTION IN GAMES WITH MULTIPLE EQUILIBRIA: AN EXPERIMENTAL STUDY

Authors

  • NICK FELTOVICH,

    1. Feltovich: Professor of Economics, University of Aberdeen Business School, Edward Wright Building, Dunbar Street, Aberdeen AB24 3QY, UK. Phone 01224 273104, Fax 01224 272181, E-mail n.feltovich@abdn.ac.uk
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  • ATSUSHI IWASAKI,

    1. Iwasaki: Research Associate, Department of Intelligent Systems, Kyushu University, Motooka 744, Nishi-ku, Fukuoka 812-8581, Japan. Phone (+81) 92 642 3880, Fax (+81) 92 632 5204, E-mail iwasaki@is.kyushu-u.ac.jp
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  • SOBEI H. ODA

    1. Oda: Professor, Faculty of Economics, Kyoto Sangyo University, Kamigamo, Kita-ku, Kyoto 603-8555, Japan. Phone (+81) 75 7051709, Fax (+81) 75 7051949, E-mail oda@cc.kyoto-su.ac.jp
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    • S.H.O. and A.I. are supported in part by Grants-in-Aid of Scientific Research (#17310029 and #17700155) and by the Ministry of Education, Culture, Sport, Science and Technology (Japan). N.F. acknowledges support from the University of Aberdeen Business School. We thank Alexander Elbittar, Yasuyo Hamaguchi, Andreas Ortmann, Anmol Ratan, John Van Huyck, Nathaniel Wilcox, Erte Xiao, and participants at several conferences and seminars for helpful suggestions and comments. We give special thanks to two anonymous referees, whose comments have improved this paper substantially. Any remaining errors are the authors'.


Abstract

Game theorists typically assume that changing a game's payoff levels—by adding the same constant to, or subtracting it from, all payoffs—should not affect behavior. Although this invariance is an implication of the theory when payoffs mirror expected utilities, it is an empirical question when “payoffs” are actually money amounts. Loss avoidance is a phenomenon where payoff-level changes matter when they change the signs of payoffs: gains become losses or vice versa. We report the results of a human-subjects experiment designed to test for two types of loss avoidance: certain-loss avoidance (avoiding a strategy leading to a sure loss, in favor of an alternative that might lead to a gain) and possible-loss avoidance (avoiding a strategy leading to a possible loss, in favor of an alternative that leads to a sure gain). Subjects in the experiment play three versions of Stag Hunt, which are identical up to the level of payoffs, under a variety of treatments. We find strong evidence of behavior consistent with certain-loss avoidance in the experiment. We also find evidence of possible-loss avoidance, although weaker than that for certain-loss avoidance. Our results carry implications for theorists modeling real-life situations with game theory and for experimenters attempting to test theory and interpret observed behavior in terms of theory. (JEL D81, C72, C73)

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