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Thompson Sampling: Endogenously Random Behavior in Games and Markets

Author

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  • Mauersberger, Felix
Abstract
Economists tend to assume that agents maximize their expected utility. However, many different experiments have questioned expected utility maximization by showing that human behavior can be characterized as random. This paper proposes Thompson Sampling as a theory of human behavior across very different situations of dynamic strategic interaction in economics. Thompson Sampling means that agents, having limited information about their environments, update their subjective belief distributions in a Bayesian way and subsequently make a random draw from the posterior. Conditional on that random draw, agents optimize. While Bayesian reasoning has often been shown to be at odds with agents' behavior even in simple environments, using data on experimental games, this paper shows that Bayesian sampling as in Thompson's proposal is a better description of agents' decision-making than commonly used theories of decision-making in economics such as Nash equilibrium, standard Bayesian learning and quantal response equilibrium (QRE) - above all in complex environments with many possible actions.

Suggested Citation

  • Mauersberger, Felix, 2019. "Thompson Sampling: Endogenously Random Behavior in Games and Markets," VfS Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203600, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc19:203600
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    More about this item

    Keywords

    Learning; adaptive learning; Bayesian learning; behavioral game theory; expectations;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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