Mental Equilibrium and Strategic Emotions

We model mental states as part of an equilibrium notion. In a mental equilibrium each player ‘selects’ an emotional state that determines the player’s preferences over the outcomes of the game. These preferences typically differ from the players’ material preferences. The emotional states interact to play a Nash equilibrium and, in addition, each player’s mental state must be a best response to the mental states of the others (in the sense of maximizing material payoffs). We discuss the concept behind the definition of mental equilibrium and examine it in the context of some of the most popular games discussed in the experimental economics literature. In particular, our approach allows us to identify the mental states (the psychology) that lead players to play various prominent experimental outcomes. We provide necessary and sufficient conditions for mental equilibria to be sustained by material preferences. Finally, we discuss the concept of collective emotions, which is based on the idea that players can coordinate their mental states. This paper was accepted by Uri Gneezy, behavioral economics.