Loss Aversion in Repeated Games

Jonathan Shalev ()

Game Theory and Information from University Library of Munich, Germany

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.

Keywords: loss; aversion; repeated; games; reference; dependence; prospect; theory (search for similar items in EconPapers)
JEL-codes: C72 (search for similar items in EconPapers)
Pages: 22 pages
Date: 1998-02-10
New Economics Papers: this item is included in nep-gth and nep-mic
Note: Type of Document - LaTeX; prepared on IBM PC ; to print on PostScript; pages: 22 ; figures: included
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Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Loss aversion in repeated games (1998)
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpga:9802005

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