The Selten School of Behavioral Economics (eBook)

Axel Ockenfels is Professor of Economics at the University of Cologne and Director of the Cologne Laboratory of Economic Research. His research focuses on behavioral and design economics. The goal of much of his recent research and applied work is to improve the performance of 'real world' markets and institutions, as well as to analyze and model individual strategies in negotiation and bidding. Ockenfels has published prominently in many research areas, including economics, business administration, information systems, psychology, and sociology. He received his diploma in economics from the University of Bonn, and both his Ph.D. and Habilitation from the University of Magdeburg. Before his current position, Ockenfels spent a couple of years at the Penn State University, Harvard University, and the Max Planck Institute of Economics in Jena. Ockenfels is a Member of the Berlin-Brandenburgische Academy of Sciences and of the Nordrhein Westfalian Academy of Sciences. In 2005 he received the Leibniz Prize of the German Science Foundation. Abdolkarim Sadrieh is Professor of Economics and Management at the University of Magdeburg and on the Scientific Board of the Magdeburg Laboratory for Experimental Economics. His research focuses on applications of game theory and experimental economics to a wide range of interaction design issues in management and economics. He has published prominently on the design of consumer and labor markets, supply-chain interaction, environmental decision-making, work incentives in organizations, and taxation. Sadrieh received his diploma and his Ph.D. in economics from the University of Bonn. Before his current position, Sadrieh was the Director of the Bonn Laboratory for Experimental Economics and the Director of the CentERlab at Tilburg University. Currently, he is the Vice President of the German Association for Experimental Economic Research (GfeW).

The Selten School of Behavioral Economics 3
Preface 5
Abstract 7
Acknowledgements 9
Contents 11
Contributors 13
Part I: Exceptional Academic Behavior 17
Chapter 1: Reinhard Selten a Wanderer 18
References 22
Chapter 2: Encounters with Reinhard Selten: An Office Mate´s Report 23
Background Story 23
First Encounters with Reinhard Selten 23
Common Fundamental Beliefs 24
A New Seminar Develops at the Sauermann Chair 25
First Forecast Experiments with the Time Course HISTO 25
OR-Problems, Ultima Ratio and Good Heuristics 26
First of All a Side Note on Available Computer Technology Now and Then 27
Another Example: Helmstädter´s Linearity Measure 28
The SINTO Market 29
A Resume of Reinhard Selten Back Then Until Today 31
Chapter 3: Reinhard Selten´s Frankfurt Years from the Perspective of a Co-player 32
References 39
Chapter 4: Reinhard Selten and the Scientific Climate in Frankfurt During the Fifties 42
Chapter 5: Reinhard Selten Labs, Bounded Rationality and China 46
Two Decades Ago 46
Experimental Economics Labs in China 54
Bounded Rationality and E-Commerce 57
References 61
Part II: Strategic Behavior 63
Chapter 6: Drei Oligopolexperimente 64
Introduction 64
Genesis: Sauermann and Selten´s ``Ein Oligopolexperiment´´ (1959) 66
The First Price Competition Experiment: Selten (1967) 68
Our Own Price Competition Trilogy: Motivation and Background 70
Price Competition with Increasing Marginal Costs 70
Price Competition Under Cost Uncertainty 72
Infinitely Repeated Games 74
Is There More Collusion in Growing Markets? 75
Are More Firms Better Than Fewer? 76
A Surprise Phenomenon 76
A New Design 79
Exploratory Experiments or Hypothesis Test: Which Is the Way Forward? 81
References 82
Chapter 7: Deviations from Equilibrium in an Experiment on Signaling Games: First Results 84
Introduction 84
Model and Experimental Design 85
Normative Analysis 86
The Extended Games 87
Experimental Design 88
Data Analysis and Results 89
Summary Results 89
Discussion and Conclusions 94
Appendix 96
References 98
Chapter 8: Strategy Choice and Network Effects 99
Coordination on Exogenous Networks 100
The Two-Player Coordination Game 100
Neighborhood Games 101
Experimental Design 103
Results 103
Strategic Network Formation 104
A Simple Model of Strategic Network Formation 104
Network Formation Experiments 107
Experimental Design 107
Experimental Results 108
Strategy Choice on Endogenous Networks 110
Appendix 114
Experimental Results of Coordination on Networks: Graphical Illustration 114
Experimental Results of the Network Formation Game: Graphical Illustrations 116
References 119
Chapter 9: Walking with Reinhard Selten and the Guessing Game: From the Origin to the Brain 120
The Origin of the Guessing Game 125
Some Other Studies of the Guessing Game 127
The Brain 127
References 131
Part III: Pro-Social Behavior 134
Chapter 10: Understanding Negotiations: A Video Approach in Experimental Gaming 135
Motivating Video Experiments 135
Video Techniques and Analysis of Verbal Data 139
Video Technologies and Documentation of Video Data 139
Pros and Cons of Video Experiments 140
Advantages of Video Experiments 140
Potential Weaknesses of Video Experiments 142
Conclusion on the Video Method 143
Analysis of Verbal Data 143
Inter-rater Reliability 144
Observing Groups as Players 144
The Games 146
The Ultimatum Game (UG) (Hennig-Schmidt et al. 2008, Walkowitz et al. 2010) 146
The Tripled Take Game (TTG) (Sadrieh and Hennig-Schmidt 1999) 147
The Power-to-Take Game (PTT) (Bosman et al. 2006) 147
The Alternating Offer Bargaining Game with random assignment of conflict payoffs (AOBr) (Hennig-Schmidt 1999 Hennig-Schmidt an
The Alternating Offer Bargaining Game with earned assignment of conflict payoffs and face-to-face bargaining (AOBe) (Hennig-Sch 149
Iterated PD (IPD) (Hennig-Schmidt and Leopold-Wildburger 2010) 149
Results 149
The Equity Principle 149
Aspiration Levels and Equity 152
Fairness and Equity 153
Mentalizing 155
Observing Group Processes in Coalition Games 157
Experimental Setup 157
The Game 159
Data Set and Results 159
Cross-Cultural and Inter-Cultural Settings 160
Aspiration Levels and Equity: Cross-Cultural Analysis 162
Fairness and Culture 163
Non-monotonic Strategies in Ultimatum Bargaining 165
Conclusive Remarks 166
References 168
Chapter 11: Institutions Fostering Public Goods Provision 174
Voluntary Cooperation 176
Voluntary Cooperation in the Laboratory 177
Punishment in Public Goods Provision 179
Endogenous Choice in Public Goods experiments 181
The Interaction of Reputation and Punishment 184
Endogenous Rule Design in Public Good Provision 186
Dynamic Public Good Games 187
Some Final Words 188
References 189
Chapter 12: Social Behavior in Economic Games 192
The Solidarity Game: What Drives Social Behavior in Economic Games? (Prepared by Axel Ockenfels) 192
Cognition and Bounded Rationality (Prepared by Werner Güth) 196
Adaptation (Prepared by Al Roth) 199
Learning Models and Experimental Data 200
Learning in Market Design 201
Motives (Prepared by Gary Bolton) 202
Summary 206
References 207
Part IV: Organizational Behavior 210
Chapter 13: The Equity Principle in Employment Relationships 211
Bilateral Relationship Between Employer and Employee 213
Gift Exchange in Multi-agent Environments 215
(Asymmetric) Reactions to Norm Violations 218
Inevitable Norm Violations 220
Supportive Evidence in Neuroeconomics 222
Conclusions 223
References 224
Chapter 14: The Analysis of Incentives in Firms: An Experimental Approach 226
Fixed Wages, Piece Rates, and Motivation Crowding Out 227
A Simple Model of Incentives Provided by Fixed Wages and Piece Rates 227
Experimental Design and Procedure 229
Results 230
The Fixed Wage Condition 230
The Choice Condition 230
The Comparison of Conditions 231
Insights from a Post-experimental Questionnaire 232
Discussion 233
Tournament Incentives and Sabotage 233
A Model of Tournaments with Sabotage 234
Experimental Design and Procedure 236
Results 238
Discussion 239
Team-Based Coordination 239
An Average Opinion Game 240
Experimental Design and Procedure 240
Results 241
Discussion 243
Conclusion 243
References 245
Part V: Risky-Choice Behavior 247
Chapter 15: Georges-Louis Leclerc de Buffon´s `Essays on Moral Arithmetic´ 248
Essays on Moral Arithmetic 255
References 284
Chapter 16: Risky Choice and the Construction of Preferences 286
Introduction 286
What If You Ask a Classical Economist? 287
What If You Ask a Behavioral Decision Researcher? 289
What If You Ask Reinhard Selten? 290
Using the Strategy Method to Uncover Decision Processes 292
Introducing the Verbal Strategy Elicitation Method 294
Conclusions 296
References 297