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Cooperation as a Result of Learning with Aspiration Levels

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It is shown that a win-stay, lose-hift behavior rule with endogenous aspiration levels yields cooperation in a certain class of games. The aspiration level in each round equals the current population average. The class of games includes the prisoner's dilemma and Cournot oligopoly and thus yields an explanation for cooperation and collusion. ; c...

It is shown that a win-stay, lose-hift behavior rule with endogenous aspiration levels yields cooperation in a certain class of games. The aspiration level in each round equals the current population average. The class of games includes the prisoner's dilemma and Cournot oligopoly and thus yields an explanation for cooperation and collusion. ; cooperation Minimize

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Title:

Competition among Conventions

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A convention can be seen as the standard way of playing a game. If different conventions exist in various geographical, social or other entities (called "towns") and if there is some mobility between these towns, which conventions, if any, will emerge as the successful ones? A simple evolutionary process is suggested and it is shown that the pro...

A convention can be seen as the standard way of playing a game. If different conventions exist in various geographical, social or other entities (called "towns") and if there is some mobility between these towns, which conventions, if any, will emerge as the successful ones? A simple evolutionary process is suggested and it is shown that the process converges to a Nash equilibrium for all games satisfying weak acyclity or a condition called evolutionary stable with respect to pure strategies (ESPS). Further, if the process converges, it converges to an efficient convention for all games in which the Pareto optimal symmetric equilibria are strict. Hence, the paper presents an explanation for the endogenous evolution of efficiency. In contrast to most recent studies in evolutionary game theory, the conclusions do not rely on random "mutations". Instead, the driving force is the tendency of players to have increased interaction with member of their own group (viscosity). Minimize

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AN EVOLUTIONARY INTERPRETATION OF MIXED-STRATEGY EQUILIBRIA

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One of the more convincing interpretations of mixed strategy equilibria describes a mixed equilibrium as a steady state in a large population in which all players use pure strategies but the population as a whole mimics a mixed strategy. To be complete, however, this interpretation requires a good story about how the population arrives at the ap...

One of the more convincing interpretations of mixed strategy equilibria describes a mixed equilibrium as a steady state in a large population in which all players use pure strategies but the population as a whole mimics a mixed strategy. To be complete, however, this interpretation requires a good story about how the population arrives at the appropriate distribution over pure strategies. In this paper I attempt to give an explanation based on an evolutionary, stochastic learning process. Convergence properties of these processes have been studied extensively but almost exclusively for the case of convergence to pure Nash equilibria. Here I study the conditions under which an evolutionary process converges to population mixed-strategy equilibria. I find that not all mixed equilibria can be justified as the result of the evolutionary learning process even if the equilibrium is unique. For symmetric 2x2 and 3x3 games I give necessary and sufficient conditions for convergence and for n*n games I give a sufficient condition. For cases in which the conditions are not satisfied counterexamples are given, in which the process enters a limit cycle. Minimize

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Decentralization and the Coordination Problem

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This paper addresses the relation between the degree of decentralization in a population and the probability of coordinating on an efficient outcome. An evolutionary learning mechanism with a group structure that allows players to "vote with their feet" is introduced. In contrast to most of the recent literature (e.g. Kandori, Mailath and Rob, 1...

This paper addresses the relation between the degree of decentralization in a population and the probability of coordinating on an efficient outcome. An evolutionary learning mechanism with a group structure that allows players to "vote with their feet" is introduced. In contrast to most of the recent literature (e.g. Kandori, Mailath and Rob, 1993) in which the risk dominant equilibrium is shown to prevail in the long run, in this paper it is demonstrated that given a general probability distribution over initial states the evolutionary learning process converges almost always to the efficient equilibrium if interaction is decentralized enough. Furthermore, it is shown how the model can be applied to the problem of product standardization. Minimize

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Title:

Herding and Contrarian Behavior in Financial Markets - An Internet Experiment

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We report results of an internet experiment designed to test the theory of informational cascades in financial markets. More than 6000 subjects, including a subsample of 267 consultants from an international consulting firm, participated in the experiment. As predicted by theory, we find that the presence of a flexible market price prevents herd...

We report results of an internet experiment designed to test the theory of informational cascades in financial markets. More than 6000 subjects, including a subsample of 267 consultants from an international consulting firm, participated in the experiment. As predicted by theory, we find that the presence of a flexible market price prevents herding. However, the presence of contrarian behavior, which can (partly) be rationalized via error models, distorts prices, and even after 20 decisions convergence to the fundamental value is rare. We also study the effects of transaction costs and the expectations of subjects with respect to future prices. Finally, we look at the behavior of various subsamples of our heterogeneous subject pool ; Herding, informational cascades, contrarian behavior, internet experiment Minimize

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Title:

Does Rationing of Shares Increase Revenues in Initial Public Offerings?

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We provide a new explanation for the apparent underpricing of initial public offerings applicable to large, regulated firms like telecommunications companies. Under the assumption that regulation is subject to political pressure by voters we demonstrate that it may be rational for issuers to ration investors in order to insure a broad distributi...

We provide a new explanation for the apparent underpricing of initial public offerings applicable to large, regulated firms like telecommunications companies. Under the assumption that regulation is subject to political pressure by voters we demonstrate that it may be rational for issuers to ration investors in order to insure a broad distribution of shares in the population. At the same time we explain the common practice of bonus systems designed to prevent investors from taking profits immediately. Minimize

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Brown-von Neumann-Nash Dynamics: The Continuous Strategy Case

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In John Nash’s proofs for the existence of (Nash) equilibria based on Brouwer’s theorem, an iteration mapping is used. A continuous- time analogue of the same mapping has been studied even earlier by Brown and von Neumann. This differential equation has recently been suggested as a plausible boundedly rational learning process in games. In the c...

In John Nash’s proofs for the existence of (Nash) equilibria based on Brouwer’s theorem, an iteration mapping is used. A continuous- time analogue of the same mapping has been studied even earlier by Brown and von Neumann. This differential equation has recently been suggested as a plausible boundedly rational learning process in games. In the current paper we study this Brown-von Neumann-Nash dynamics for the case of continuous strategy spaces. We show that for continuous payoff functions, the set of rest points of the dynamics coincides with the set of Nash equilibria of the underlying game. We also study the asymptotic stability properties of rest points. While strict Nash equilibria may be unstable, we identify sufficient conditions for local and global asymptotic stability which use concepts developed in evolutionary game theory. ; learning in games, evolutionary stability, BNN Minimize

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Overbidding in Fixed Rate Tenders - An Empirical Assessment of Alternative Explanations

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This paper investigates various theories explaining banks' overbidding in the fixed rate tenders of the European Central Bank (ECB). Using auction data from both the Bundesbank and the ECB, we show that none of the theories can on its own explain the observed overbidding. This implies that the proposed new rules by the ECB, aimed at neutralizing...

This paper investigates various theories explaining banks' overbidding in the fixed rate tenders of the European Central Bank (ECB). Using auction data from both the Bundesbank and the ECB, we show that none of the theories can on its own explain the observed overbidding. This implies that the proposed new rules by the ECB, aimed at neutralizing interest rate expectations, would not eliminate overbidding if the rationing rule in the fixed rate tenders remains unchanged. ; Overbidding, repo auctions, monetary policy instruments of the European Central Bank Minimize

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On the Dynamic Foundation of Evolutionary Stability in Continuous Models

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We show in this paper that none of the existing static evolutionary stability concepts (ESS, CSS, uninvadability, NIS) is sufficient to guarantee dynamic stability in the weak topology with respect to standard evolutionary dynamics if the strategy space is continuous. We propose a new concept, evolutionary robustness, which is stronger than the ...

We show in this paper that none of the existing static evolutionary stability concepts (ESS, CSS, uninvadability, NIS) is sufficient to guarantee dynamic stability in the weak topology with respect to standard evolutionary dynamics if the strategy space is continuous. We propose a new concept, evolutionary robustness, which is stronger than the previous concepts. Evolutionary robustness ensures dynamic stability for replicator dynamics in doubly symmetric games. ; replicator dynamics, evolutionary stability, ESS, CSS Minimize

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Title:

The Limited Liability Effect in Experimental Duopoly Markets

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Brander and Lewis argue in a seminal paper (AER, 1986) that a firm's debt-equity ratio should have important strategic effects on product market competition. We test their model in a duopoly experiment under both, Bertrand and Cournot competition. We find that leverage has strategic effects, but those effects are much weaker than predicted by th...

Brander and Lewis argue in a seminal paper (AER, 1986) that a firm's debt-equity ratio should have important strategic effects on product market competition. We test their model in a duopoly experiment under both, Bertrand and Cournot competition. We find that leverage has strategic effects, but those effects are much weaker than predicted by theory. Specifically, we find for price competition a general tendency towards collusion, which has the same overall consequences - but deviates from - the subgame perfect equilibrium prediction. With quantity competition subjects choose much less debt than predicted by theory. It appears that subjects recognize the strategic effects of their own debt. However, they do not (want to) acknowledge possible strategic advantages of opponents' debt. ; oligopoly, bankruptcy, debt-equity ratio Minimize

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