Net-Loss Reciprocation and the Context Dependency of Economic Choices

This paper proposes a novel explanation for the context dependency
of individual choices in two-player games. Context dependency
refers to the well-established phenomenon that a player, when
choosing from a given opportunity set created by the other player’s
strategy, chooses differently in different situations because of
different alternatives to the other player’s strategy. The utility
model used to explain this kind of context dependency incorporates
a preference for net-loss reciprocation. Net-loss reciprocation
means that a player’s willingness to impose a net loss (i.e., loss
minus gain) on the other player increases in the net loss that he
or she derives from the other player’s strategy. I show that
net-loss reciprocation together with the method for calculating net
losses developed in this paper explains the context dependencies in
individual behaviour that have been documented in a number of
experimental studies, whereas existing models of intention-based
reciprocity fail to explain all the evidence.