PGT: A statistical approach to prediction and mechanism design

Abstract

One of the biggest challenges facing behavioral economics is the lack of a single theoretical framework that is capable of directly utilizing all types of behavioral data. One of the biggest challenges of game theory is the lack of a framework for making predictions and designing markets in a manner that is consistent with the axioms of decision theory. An approach in which solution concepts are distribution-valued rather than set-valued (i.e. equilibrium theory) has both capabilities. We call this approach Predictive Game Theory (or PGT). This paper outlines a general Bayesian approach to PGT. It also presents one simple example to illustrate the way in which this approach differs from equilibrium approaches in both prediction and mechanism design settings. © Springer-Verlag Berlin Heidelberg 2010.