What Is Behavioral Economics?

Abstract

This chapter defines behavioral economics as “the study of economics which does not rely on the assumption of the rational, selfish economic man.” It also gives some examples of experimental studies in behavioral economics.

Appendix: Nash Equilibrium

This Appendix gives a definition of Nash equilibrium for pure strategies (see, e.g., Tadelis 2013 for more details).⁹ Consider a game in which there are n players, and let the set of players be $N = \left\{ {1,2, \ldots ,n} \right\}$. Let S_i denote the set of all possible strategies $s_{i}$ of player $i$ and $u_{i} \left( {s_{i} ,s_{ - i} } \right)$ denote the utility function when player $i$ chooses strategy $s_{i}$, when the other players choose strategies $s_{ - i} = \left( {s_{1} , \ldots ,{\text{s}}_{i} - 1,s_{i} + 1, \ldots ,s_{i} } \right)$ (here, $j = 1, \ldots ,n$ and $s_{j} \in S_{j}$ For a pair of pure strategies, $(s_{i} , s_{ - i} )$, if for other players’ strategies $s_{ - i}$,

$$u_{i} \left( {s_{i} , s_{ - i} } \right) \ge u_{i} \left( {t, s_{ - i} } \right)$$

(1.A1)

hold for all $t \in S_{i}$, we call this strategy s_i a best response to $s_{ - i}$.

Here, when the pair of strategies $\left( {s_{i} , s_{ - i} } \right)$ satisfy (1.A1) for all t∊S_i and i∊N, we call it a Nash equilibrium. In other words, Nash equilibrium is the strategy pair in which each player is choosing a best response to the strategies of all other players.