Pierpaolo Battigalli
Università Bocconi, Italy
Higher order beliefs and emotions in games
Emotions affect the valence of outcomes and yield action tendencies. Many emotions are triggered by beliefs. It is therefore important to develop a methodology to incorporate the role of emotions in mathematical models of human interaction by analyzing how hierarchical beliefs affect the subjective values of outcomes and actions in games. Such methodology is now called “psychological game theory” after the seminal work of Geanakoplos et al. (Games Econ. Behav., 1989). The initial approach was to make the utility of outcomes (endnodes) depend on hierarchical beliefs and adapt the standard “rational-expectations” equilibrium analysis to such “psychological” games. I argue that a more radical departure from standard game theory is advisable. In many applications of standard (“non-psychological”) game theory, standard “rational-expectations” equilibrium analysis is questionable and lacks thorough foundations. The problem is even more serious in “psychological” games. Such problems can be addressed, at least in part, referring to the foundations of game theory. I suggest that serious predictions/explanations by means of game theory of real life and lab phenomena where emotions matter must face up front the following issues: (i) information about psychological features of agents is incomplete and hardly representable with common prior models; (ii) behavior in sequential games does not result from the choice of strategies, but rather from the choice of actions within the context of plans, which are—essentially--beliefs about one’s own behavior; (iii) stable behavior in recurrent interaction should be explained as a self-confirming equilibrium, where agents’ beliefs about relevant unknowns are typically wrong, but they are confirmed by available evidence; (iv) behavior in non-recurrent interactions should be (coarsely) predicted by a few steps of iterated deletion of non-best replies subject to some plausible restrictions on low-order beliefs; (v) “decision utility” (action tendencies) sometimes cannot be derived from “experience utility” (outcome values). This is illustrated by a wealth of applications.

Gabriele Chierchia
Max Planck Institute for Cognitive and Brain Sciences, Germany
Cognitive and motivational bases of social decision making
I will present experimental work on the role of non standard motives and emotions, such as sympathy, care and power, in economic decision making. The first part of my talk will focus on how widespread social feelings, such as “homophily” (i.e., “love for similar others”) and friendship, could be used as coordination devices to solve one-shot decision problems involving strategic complements (e.g., stag hunts) and substitutes (entry games). The second part will focus on ways to experimentally induce well-known psychological motives, such as care and power, and on their differential impact on decisions. Throughout, I will emphasize the evidence suggesting that motivation (e.g., preferences) and cognition (e.g., beliefs/inferences) are dissociable yet interacting forces in mediating the impact of these motives and emotions on social decision making, both at the behavioral and neural level.

Teppo Felin
University of Oxford, United Kingdom
What is Rationality? Individual and aggregate considerations.
In this presentation I discuss the nature of rationality, focusing on both individual and aggregate considerations. I first provide a historical overview by focusing on Herbert Simon's conception of rationality, along with linking it to current work by Daniel Kahneman and others in behavioral economics. My particular focus is on the perceptual foundations of this work (assumptions about awareness, veridicality, etc), and the problem that these foundations present for understanding rationality. Building on insights from the cognitive sciences I discuss the outlines of an alternative view of rationality. I argue that this alternative model is well suited for the ambiguous, uncertain and multistable situations that individual and aggregate economic actors find themselves in. I link this work to the conference theme of emotion and anticipation, and the more
general microfoundations of expectations and beliefs.

Sebastian Grüneisen
Max Planck Institute for evolutionary Anthropology, Germany
I know you don’t know I know… Children’s use of recursive mental state reasoning for peer coordination
Humans have to coordinate their behavior with others. While we do this with great efficiency as adults this facility is not present from birth and can hide significant psychological challenges: In order to coordinate successfully, we must often reason about what others are likely to do. A problem arises since others will be reasoning similarly about what we will do (which depends on what we think they will do, and so on). What is required is some kind of “meeting of minds” (Schelling, 1960), that is, some form of shared knowledge. We hypothesize
that the ability to reason recursively about mental states can facilitate coordination by helping us determine the extent to which we share knowledge with others. In my talk, I will present data showing that this is already within the capacity of 6-year-old children. Participants (N = 104) were presented with acoordination task requiring them to insert a ball into the same of four boxes as a partner in order to access a reward. One saliently marked box always contained a larger reward than the others making it the obvious solution at training. At
test, however, children were informed that the largest reward was mistakenly placed into a different box (i.e. not the saliently marked one). In addition, we manipulated what children thought their partner knew about the erroneous reward placement. The result was that in two experimental phases children successfully adjusted their decisions to a partner’s false belief (phase 1) and a partner’s false belief about their own belief (phase 2) about the location of the largest reward. By age six, children can thus use recursive mental state reasoning to
aid their coordination efforts.

Thorbjørn Knudsen
Syddansk Universitet, Denmark
The micro-foundations of coupled learning processes: Organizational learning and allocation of attention
We examine how attention allocation influences a process of coupled learning. We obtain experimental evidence from a design where a boss, or principal, must learn to identify rewarding tasks based on the feedback provided by an agent. The agent, in turn, is engaged in classical regression learning with the added complication that her performance depends on the task the principal gives to her. We combine laboratory experiments with the development of a multi-level learning model that closely replicates and predicts experimental evidence. Our experiments provide evidence for large performance heterogeneity across the principal-agent pairs, and show that allocation of attention is a major determinant of long-term performance. Our model suggests that early interaction of attentional processes involving both the principal and the agent decisively affects long-term performance, generating self-reinforcing dynamics that lock the principal-agent pairs in either vicious or virtuous coupled learning processes.

Rosemarie Nagel
Universitat Pompeu Fabra, Spain
State of the art of research on higher order beliefs: theory and experiments.
I will present theoretical advances and experimental evidence about the concept "higher order beliefs," i.e., players' beliefs about other players beliefs, players' beliefs about other players' beliefs about other players' beliefs, and so on. The core game demonstrating the relationship between theory and bounded rational behavior is the beauty contest game, spanning a rich set of class of games in micro and macroeconomics of expectation formation. The corresponding bounded rational model explaining experimental data is the socalled level k model or cognitive hierarchy models. While game theoretic reasoning often leads to unique or few possible solutions (based on common knowledge of rationality), experimental evidence presents heterogeneous behavior given random behavior, cognitive constraints, or beliefs of constraints of other agents. Simple best reply reactions without higher order beliefs might be the predominant outcome in most of the situations. This is in particular true when faced with limited information about the environment or other agents’ behavior and behavior over time, resulting in simple adaptive behavior. Theoretical advances, incooperating such results, have been made in particular in microeconomic theory but also recently in macroeconomic theory. There are also some initial field studies that demonstrate this kind of bounded rational reasoning.

Rainer Reisenzein
Universität Greifswald, Germany
A psychological perspective on emotions
How are emotions generated, what is their nature, and what is their function in the architecture of the mind? In my talk I give an overview of the main answers to these questions proposed by emotion psychologist and describe my own favored theoretical view of emotions. I end with some speculative comments on the possible role of emotions for solving coordination problems.

Burkhard Schipper
University of California, Davis, USA
(i) An experiment on empathy, (ii) Emotions and the design of institutions