Framing Game Theory

Hitoshi Matsushima

No CARF-F-428, CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo

Abstract: A real player sometimes fails to practice hypothetical thinking, which increases the occurrence of anomalies in various situations. This study incorporates psychology into game theory and demonstrates a cognitive method to encourage bounded-rational players to practice correct hypothetical thinking in strategic interactions with imperfect information. We introduce a concept termed "frame" as a description of a synchronized cognitive procedure through which each player decides multiple actions in a step-by-step manner, shaping his (or her) strategy selection. We could regard a frame as the supposedly irrelevant factors from the viewpoint of full rationality. However, this paper theoretically shows that in a multi-unit trading with private values, the ascending proxy auction has a significant advantage over the second-price auction in terms of the bounded-rational players' incentive to practice hypothetical thinking, because of the difference, not in physical rule, but in background frame. By designing a frame appropriately, we generally show that any static game that is solvable in iteratively undominated strategies is also solvable, even if players cannot practice hypothetical thinking without the help of a well-designed frame. We further investigate the possibility that even a detail-free frame design serves to overcome the difficulty of hypothetical thinking. We extend this investigation to the Bayesian environments.

Pages: 41 pages
Date: 2018-02
New Economics Papers: this item is included in nep-cbe, nep-exp and nep-gth
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https://www.carf.e.u-tokyo.ac.jp/old/pdf/workingpaper/fseries/F428.pdf (application/pdf)

Related works:
Working Paper: Framing Game Theory (2018)
Working Paper: Framing Game Theory (2017)
Working Paper: Framing Game Theory (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:cfi:fseres:cf428

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