Author(s): Pierpaolo Battigalli, Roberto Corrao, Martin Dufwenberg
Psychological game theory (PGT), introduced by Geanakoplos, Pearce & Stacchetti (1989) and significantly generalized by Battigalli & Dufwenberg (2009), extends the standard game theoretic framework by letting players'utility at endnodes depend on their interactive beliefs. While it is understood that a host of applications that model and/or test the role of emotional and other psychological forces find their home in PGT, the framework is abstract and comprises complex mathematical objects, such as players' infinite hierarchies of beliefs. Thus, PGT provides little guidance on how to model specific belief-dependent motivations and use them in game theoretic analysis. This paper takes steps to fill this gap. Some aspects are simplified -e.g., which beliefs matter -but others are refined and brought closer to applications by providing more structure. We start with belief-dependent motivations and show how to embed them in game forms to obtain psychological games. We emphasize the role of time and of the perception of players' intentions. We take advantage of progress made on the foundations of game theory to expand and improve on PGT solution concepts.
Keywords: Psychological game theory; Belief-dependent motivation; Intentions; Time; Rationalizability; Self-confirming equilibrium; Bayesian sequential equilibrium
JEL codes: C72; C73; D81; D82; D92