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Essays on strategic uncertainty with non-subjective expected utility agents

University of British Columbia

This thesis contains three distinct chapters that contribute to our understanding of how people respond, both theoretically and in controlled experimental environments, to uncertainty that results from the strategic decisions of others. The standard framework for studying strategic interactions involves agents with Subjective Expected Utility preferences (Savage, 1954) interacting in an environment where, in equilibrium, all strategies are known to all agents. This thesis studies the effects of relaxing preferences to allow for ambiguity aversion, regret minimization, and approximate optimization. The first chapter experimentally investigates the role of uncertainty aversion in normal form games. Theoretically, risk aversion will affect the utility value assigned to realized outcomes while ambiguity aversion affects the evaluation of strategies. In practice, however, utilities over outcomes are unobservable and the effects of risk and ambiguity are confounded. This chapter introduces a novel methodology for identifying the effects of risk and ambiguity preferences on behaviour in games in a laboratory environment. Furthermore, we also separate the effects of a subject's beliefs over her opponent's preferences from the effects of her own preferences. The second chapter studies, experimentally, a simple dynamic entry game in both continuous and discrete time. We introduce new laboratory methods that allow us to eliminate natural inertia in subjects' decisions in continuous time experiments. Using our novel continuous time setting and the standard discrete time setting as benchmarks, we study the effects of inertia (caused by naturally occurring reaction lags) on behaviour. We demonstrate that the observed patterns of behaviour are consistent with standard models of decision making under uncertainty, and that the degree of inertia affects subject responses to strategic uncertainty. The third chapter examines, theoretically, the role of mixed strategies for agents with ambiguity averse preferences. This chapter demonstrates how a well known result from cooperative game theory, that a non-additive measure over a set of states can be equivalently represented by an additive measure over the set of events, can be used to introduce mixed strategies (in an equilibrium preserving fashion) to existing pure strategy equilibrium concepts.

Text

2016-07-16

Attribution-NonCommercial-NoDerivatives 4.0 International

http://hdl.handle.net/2429/58445

Economics

University of British Columbia

UBCV

http://creativecommons.org/licenses/by-nc-nd/4.0/