BoundedRationality_TheAdaptiveToolbox.pdf

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Kevin A. McCabe and Vernon L. Smith
understanding; (b) move information is another way to promote triadic understanding
since it communicates intentions through both foregone opportunities,
and what payoffs remain as admissible future opportunities.
THE GOODWILL ACCOUNTING STRATEGY
One goal of this area of research is to develop models of goodwill accounting
that have predictive success in the laboratory. Figure 18.5 shows an intelligent
agent representation of the goodwill accounting strategy. The agent is labeled, /,
and is playing agenty. Strategies shown in octagons represent agent/'s choice: C
for cooperate,/) for defect,^ for avoid, P for punish. Strategies in brackets {}
represent agent j 's choices as seen by agent /. The addition of Ufor unknown indicates
that agent/ may not see agent/s strategy either during activation of the
choice rule or later in the updating rule. Not modeled is the activity necessary to
convert any exchange context into this symbolic form.
As described above, the choice component of the goodwill mechanism is
given by the relationshipgji > x*, which results in cooperation by /. Of course at
the same time, j is choosing what to do based on gj l > x J . Notice that confusion
between/ andycan arise from two sources. First, they may disagree on the intrinsic
risk of the game, i.e.,*' * x J \ Second, they may disagree in how much goodwill
each gives the other. Such confusion can result in less cooperation and thus
provides a role for a mind-reading system.
In Figure 18.5 mind reading is modeled in two ways. First, we model mind
reading by treating** and JC 7 as random variables. We can determine the degree
of agreement that agents / andy reach on X by how tightly x? and* 7 are distributed
aroundX This precision is determined by the individual specific parameter
of the uniform distribution, z l . A second form of mind reading is to give an individual
the ability to predict his or her goodwill with someone else. For example,
hj l is agent /'s prediction of his or her goodwill with agenty, i.e., g/ 1 . The precision
of hj l is again treated as a random variable drawn from a uniform distribution
around the true goodwill accountg/', with individual specific parameter,y l .
The effect of hj l is that agent / can now form some expectation about agent/s
likely behavior. If, for example, hf < JC 7 , then agent / would realize that agenty is
likely to defect under these circumstances because i does not yet have enough
goodwill withy for the degree of risk in the current situation. If agent / can avoid
the situation, then agent / can avoid the resulting mutual loss of goodwill. This
helps explain the previously cited work by Orbell and Dawes (1993). However,
mind reading provides agents with imperfect predictions of their goodwill with
others. If in fact agent/ does not yet know what agenty is doing, given by U, then
/will use his or her judgment prior to deciding on an action. In Figure 18.5, if h\ l