On the Role of Emotions in Games
Abstract: Numerous experiments have shown that players cooperate in a prisoner's dilemma (PD) game. I contribute to this literature by showing that emotions might be the key to overcoming the coordination failure. I model emotions by generally distinguishing between two types of emotions: First, expected emotions play a central role. These are experienced not during the decision-making, but are rather ex post, i. e. after the outcomes are realized. In this regard, standard theory accounts for expected emotions by allowing for phenomenons such as fairness considerations, inequality aversion and temptation in iterated PD games. I describe how expected emotions - in particular satisfaction, anger, remorse and disappointment - may have an impact on the perceived payoff in a PD game. Second, immediate emotions seem to be equally important in my model. Immediate emotions, just as expected emotions, arise from considering the consequences of one's decision. The crucial difference, however, is that they are experienced during the decision-making. In introducing immediate emotions I apply the projection bias model developed by Loewenstein et al. (2003) and embed the perceived payoff into the projection bias model. I find that expected emotions might lead to the emergence of a new Pareto-efficient Nash equilibrium in which all players cooperate. However, immediate emotions might destroy this equilibrium instantaneously.