Review of Business and Economic Literature vol:57 pages:37-60
Experimental evidence appears to contradict traditional game theory predictions in numerous settings. Although a solid basis for characterizing equlibria, game theory needed to – and to some extent did – go through some major developments and transgress the barriers between different social sciences to more accurately depict human behaviour in economic circumstances. Psychological game theory, first developed in the 80s, is one such advancement. By integrating beliefs directly within utility, it seeks to tie affective psychology to economic choice and thus predict emotional decision making. This paper reviews existing literature on psychological game theory and a strand of prospect theory relevant to emotional decision-making, and proposes further refinements and possible extensions.