Applications of Psychological Game Theory to Self-Handicapping and Auctions

Psychological game theory, established by Geanakoplos, Pearce, and Stacchetti (1989) and extended by Battigalli and Dufwenberg (2009), is a framework that allows players in games to have belief-dependent utilities. Belief-dependent utilities are useful for capturing preferences such as reciprocity, anger, guilt, and image concerns among others. Throughout the three chapters in this dissertation, I use the framework of psychological game theory to analyze two applications: self-handicapping and auctions. In my first chapter, I model rational agents with preferences for maintaining self-esteem. These preferences are belief-dependent, in that the agent's utility depend on a function of their ex post expectation of their own ability level, which they initially do not know. If this function is strictly concave, these agents may seek out actions that inhibit their performance. This phenomenon is called self-handicapping. I then consider policy implications if the population has self-esteem concerns. I use the theory from my first chapter to derive testable hypotheses, which I implement in my second chapter. Specifically, I design an experiment to test for self-handicapping behavior. Subjects answer questions from a Raven's Progressive Matrices test, a test of intelligence. Each question includes an option to randomize the answer choice, a self-handicapping strategy. The subjects are exposed to different information about their scores. This varies the impact of the Raven's test on their self-esteem. I hypothesize that there will be more use of randomization when subjects receive more information about their scores. Finally, in my third chapter, I characterize the pure strategy equilibria in complete information auctions when bidders have reciprocity preferences. The equilibria under standard preferences persist, but two additional types of equilibria arise. In the Refusing to Lose equilibrium, the winning bidder does not have the highest value for the item. This type of equilibrium is sustained by negative reciprocity. In the Kind Ties equilibrium, three or more bidders tie for the winning bid at a price below all of their values for the item. This type of equilibrium is sustained by positive reciprocity