Theoretical Advances Spurred by “Stubborn Facts”

Abstract

Economists have regarded behavioral economics as contributing evidence violating accepted theories. This paper contends that a second, perhaps more important, contribution is the new theory that has arisen to address these challenges. To illustrate, the paper examines how a single observed fact, cooperation in the finitely-repeated prisoners’ dilemma, has led to extensions of the folk theorem as well as to new concepts including sequential equilibrium, quantal response equilibrium, psychological game theory, and pregame and post-game perfection. Thus, the observed departures from previously-standard theories have led to not only new understandings of behavior, but also to additions to the economics toolkit.