One of the successes in contemporary social science is the development and proliferation of game theory. For a wide range of phenomena, game theory produces enormous insight into the strategic interaction of individuals. Its greatest power lies with predicting the behavior of large groups -- whether this is in the context of markets, political elections, information aggregation or when confronting large-scale social dilemmas. However, as Ostrom (1998) reminds us, game theory also generates predictions for small group behavior that are at variance with the results of carefully controlled (and replicated) laboratory experiments.
The primary approach adopted to explain the non-equilibrium behavior observed in experiments and connect it more carefully with game theoretic models is "behavioral game theory" (Camerer, 1997). Two branches of theoretical and experimental research have dominated recent research: the investigation of bounded rationality and learning behavior &endash; how individuals learn to play a new game in an unfamiliar context; and the extension of utility functions to include so-called "exotic" preferences &endash; other-regarding preferences for fairness, altruism, spite, status. Both approaches have achieved considerable insight. This research focuses on the latter.
In the first section of the paper we sketch the motivation for the consistency of non-equilibrium behavior. In the second section we review some of the extensive literature on facial expressions, largely drawn from social psychology. The third section discusses two laboratory experiments that lay the foundation for expectations about behavior and test those expectations using the ultimatum game. The fourth section concludes that individuals are concerned about the intentions of others. However, it is not the case that people have generalized preferences for "fairness." Instead, people take into account the intentions of their counterparts and then respond accordingly.