Noncooperative Games With Prospect Theoretic Preferences

We study noncooperative games with uncertain payoffs, where agents display irrational behaviors in response to underlying risk factors. Our formulation incorporates prospect theory, a behavioral model used to describe agents’ risk attitude, into the equilibrium theory of noncooperative $N-$ agent games. We show that the resulting nonconvex nonsmooth game admits equilibria and provide convergence guarantees for their computation. Further, the concept of “Price of Irrationality” is introduced to quantify the suboptimality induced by irrational behaviors. Finally, we provide bounds on the performance of a class of prospect theoretic aggregative games and illustrate our results on an electricity market game.