Fear is an important factor in decision making under risk and uncertainty. Psychology research suggests that fear influences one's risk attitude and fear may have important consequences for decisions concerning for example investments, crime, conflicts, and politics. I model strategic interactions between players who can be in either a neutral or a fearful state of mind. A player's state of mind determines his or her utility function. The two main assumptions are that (i) fear is triggered by an increase in the probability or cost of negative outcomes and (ii) a player in the fearful state is more risk averse. A player's beliefs over the probability and cost of negative outcomes determine how the player transitions between the states of mind. I use psychological game theory to analyze the role of fear in three applications, a robbery game, a bank run game, and a public health intervention.
Cooperation between Emotional Players
I use the framework of stochastic games to propose a model of emotions in repeated interactions. An emotional player can be in either a friendly, a neutral, or a hostile state of mind. The player transitions between the states of mind as a response to observed actions taken by the other player. The state of mind determines the player’s psychological payoff that together with a material payoff constitutes the player’s utility. In the friendly (hostile) state of mind, the player has a positive (negative) concern for other players’ material payoffs. This paper shows how emotions can both facilitate and obstruct cooperation in a repeated prisoners’ dilemma game. In finitely repeated games, a player who cares only for their own material payoffs can have an incentive to manipulate an emotional player into the friendly state of mind. In infinitely repeated games with two emotional players, less patience is required to sustain cooperation. However, emotions can also obstruct cooperation if they make the players unwilling to punish each other, or if the players become hostile when punished.
Information Sharing between Buyers
This paper studies the effect of buyer information sharing on market outcomes when the buyers are emotionally motivated to share information about the quality of an experience good. The game has one seller and two buyers. The seller has two units of a product to sell and privately knows the product's quality. The seller has an incentive to “overcharge” the buyers by choosing a price above the buyers' valuation of the quality. The buyers learn the quality after purchase and decide whether to share their knowledge with any subsequent buyer. It is costly for the buyers to share information, but that they may be emotionally motivated to do so. In a benchmark case without information sharing, the buyers expect to be overcharged and may therefore refrain from buying. Emotionally motivated information sharing can be Pareto improving by reducing overcharging and increasing the probability of trade.
Professor Pierpaolo Battigalli, Department of Decision Sciences, Bocconi University, Milano, Italien
Docent Erik Mohlin, Department of Economics, Lund University
Professor Anna Dreber Almenberg, Department of Economics, Stockholm School of Economics
Professor Olof Johansson Stenman, Department of Economics, School of Business, Economics and Law, University of Gothenburg
Professor Mikael Lindahl, Department of Economics, School of Business, Economics and Law, University of Gothenburg