A Test of Game-Theoretic and Behavioral Models of Play in Exchange and Insurance Environments

Game theory provides a convenient tool to describe and predict behavior in strategic environments. Environments that are too complex to be analyzed directly can be reduced to simple structures that can be "solved" using well-developed game-theory techniques. However, the results of numerous controlled economics experiments have led researchers to claim that game theory does not accurately describe observed behavior. For example, many researchers have found positive contributions in public good experiments. Gerald Marwell and Ruth E. Ames (1985) discovered that under most conditions the mean individual contlibution is in the range of 40 percent to 60 percent instead of the theoretical 0. Even experiments conducted with less-complicated games, such as one-shot dictator or ultimatum games, generate a substantial number of non-Nash equilibrium outcomes. Werner Guth et al. (1982) found that in an ultimatum pie-splitting game, subjects in the theoretical power position retained only a 65-percent share of the pie, instead of the predicted 100 percent. In such bargaining games the modal response is often to split the pie 50/50 as Gary Bornstein and Ilan Yaniv (1998) found in their individual one-shot experiments. Elizabeth Hoffman and Matthew L. Spitzer (1985) and Hoffman et al. (1994) introduced anonymity and property rights as treatments in one-shot game experiments. These treatments result in an increase in observed behavior that is considered more consistent with game theory. Reported behavior from these prior expeliments does not invalidate game theory as a model of behavior. The predictions of game theory are derived from the utility players receive based on outcomes. The conclusions drawn from initial experiments assumed that monetalry outcomes were monotonically related to utility and that people do not have other regarding preferences. If game theory is to be useful in applied economics, that is if game-theoretical predictions are to have power in the real world, a method for predicting behavior from the obselvable outcomes needs to be constructed. Based on the results of laboratoliy experiments, researchers are developing alternative models to explain behavior in strategic environments. The two games presented in this paper, "Exchange" and "Insurance," provide an environment in which each of these models makes distinct predictions. These two games differ only in the subgame-perfect equilibrium outcome. While the Exchange game allows for mutual gain, Insurance has no such opportunity. The models of behavior considered in this paper are tested using experimental methods in a controlled laboratory setting. The results of the experiments indicate that none of the models considered accurately describe observed behavior. Participants in this expeliment played once in only one of the two games. One-shot games provide insight into many situations where parties only interact once. In this environment there is no ability for agents to learn. While repeated play may lead to behavior that is consistent with a particular model,' all of the models considered in this study purport to explain actions from underlying behavioral phenomena that do not need to be learned. This article proceeds with a description of several theoretical models of behavior. Next, an experimental design that discerns among these theories is discussed in Section II. Following the experimental design is Section III, which outlines the predictions and implications of each model under investigation. Experimental results are then presented in Section IV, and the success of each model is discussed. Conclusions are presented in Section V. * Department of Economics, Walton College of Business, University of Arkansas, Fayetteville, AR 72701 (e-mail: cdeck@walton.uark.edu). The author wishes to thank James C. Cox, Kevin A. McCabe, and Vernon L. Smith for invaluable comments and insights. This research was conducted while the author was a graduate student at the University of Arizona. l Kevin A. McCabe et al. (1998) examine the distinction between single and repeated play in extensive-form-game experiments.