Dynamic psychological games

The motivation of decision makers who care for various emotions, intentions-based reciprocity, or the opinions of others may depend directly on beliefs (about choices, beliefs, or information). Geanakoplos, Pearce and Stacchetti [J. Geanakoplos, D. Pearce, E. Stacchetti, Psychological games and sequential rationality, Games Econ. Behav. 1 (1989) 60-79] point out that traditional game theory is ill-equipped to address such matters, and they pioneer a new framework which does. However, their toolbox - psychological game theory - incorporates several restrictions that rule out plausible forms of belief-dependent motivation. Building on recent work on dynamic interactive epistemology, we propose a more general framework. Updated higher-order beliefs, beliefs of others, and plans of action may influence motivation, and we can capture dynamic psychological effects (such as sequential reciprocity, psychological forward induction, and regret) that were previously ruled out. We develop solution concepts, provide examples, explore properties, and suggest avenues for future research. (C) 2008 Elsevier Inc. All rights reserved.