In practice, the homo economicus has been found to be geared to some form of bounded rationality, in which assumptions are simplified and heuristics are deployed due to psychological predispositions, computational deficiencies and time constraints, which lead to solutions that are satisfactory rather than optimal. To take these findings into account, behavioural game theory has developed models that predict behaviour in games in real life terms, moving away from the assumption of the economically rationally acting agent. Experimental evidence has shown that many players engage in altruistic cooperation or altruistic punishment, and show some inequality aversion even at a net cost, instead of acting purely as a homo economicus. While standard equilibrium analysis assumes that all agents act rationally, behavioural game theory has extended the theoretic framework of game theory to account for human behaviour in real life settings. More accurate predictions help in designing more effective mechanisms and policies which ultimately should make the coordination of efforts and the allocation of resources more efficient. As a method, game theory helps individuals and firms to study rational behaviour in interactive decision problems. Introduction Game theory has been developed as a general framework for decision making in uncertainty when payoffs depend on the actions taken by other players. “Wouldn’t economics make a lot more sense if it were based on how people actually behave, instead of how they should behave?” Dan Ariely 1 1. Building on aspects and concepts from behavioural decision theory, behavioural game theory combines theory and experimental evidence to provide a better understanding of strategic behaviour in economic, political and social interactions. At the core of game theory is the concept that players reason what other players will do, usually by going through iterations of players guessing what other players will do. This paper examines how behavioural game theory offers valuable alternatives as predictions assuming bounded rationality have consistently been found to be more accurate than traditional models over a broad variety of application.

While standard equilibrium analysis assumes that all agents act rationally, behavioural game theory has extended the theoretic framework of game theory to account for human behaviour in real-world settings.

However, the practical application of game theory has been lagging behind its potential. When applied correctly, game theory can present a strategic tool for decision making that offers perspectives on how players may act under various circumstances.

Using game theory in real life