• Beliefs and Emotions in Games and Decisions

      Dufwenberg, Martin; Smith, Alexander Charles; Dufwenberg, Martin; Breman, Anna; Connolly, Terry (The University of Arizona., 2009)
      This dissertation studies models of belief-dependent motivations in three essays.The first essay studies the Koszegi-Rabin model of reference-dependent preferences in a laboratory experiment. The propose a model where the reference point to which consumption outcomes are compared is endogenously determined as a function of lagged, probabilistic beliefs. This paper presents an experiment designed to test some predictions of the Koszegi-Rabin model. The experimental design controls for potential confounds suggested by their theory. The experimental results support their prediction of an endowment effect but do not show the attachment effect predicted by their model.The second essay, coauthored with Martin Dufwenberg and Matt Van Essen, studies how revenge may mitigate the hold-up problem from contract theory. When contracts are incomplete or unenforceable, inefficient levels of investment may occur due to hold-up. If individuals care for negative reciprocity these problems may be reduced, as revenge becomes a credible threat. However, negative reciprocity has this effect only when the investor holds the rights of control of the investment proceeds. We explore this issue analytically, deriving predictions for hold-up games which differ as regards assignment of rights of control. We also test and support these predictions in an experiment.Revenge may be driven by anger. The third essay proposes two belief-dependent models of anger: frustrated anger and anger from blame, which correspond to differing views of the emotion in the psychology literature. Both models build upon the idea that anger occurs when outcomes differ from players expectations. They differ in that anger from blame also incorporates updated beliefs and a notion of other-responsibility. The models are compared with each other and with existing models of negative reciprocity in several examples.