Equilibrium notions and framing effects

Details Equilibrium notions and framing effects Equilibrium notions and framing effects

2010-12-03

arxiv.org/abs/1012.1188v2

Economy

Quantitative Finance

General Finance

15 pages, 2 figures

Scientific paper

Experimental economics has repeatedly demonstrated that the Nash equilibrium makes inaccurate predictions for a vast set of games. Instead, several alternative theoretical concepts predict behavior that is much more in tune with observed data, with the quantal response equilibrium as the most prominent example. However, here we show that this equilibrium notion itself, like any other concept that varies smoothly with the payoffs, is necessarily subject to framing effects: If the same economic problem is represented in a different but equivalent way, the predicted results will differ. As a consequence, we argue that tools and methods that are successful in explaining human behavior in laboratory experiments may be unsuitable for doing theory.

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