This chapter covers selected topics in behavioral game theory. We begin with the winner’s curse in common value auctions where players overbid in auctions and make losses. We then consider standard bargaining models such as the Nash bargaining outcome and alternating offers bargaining; the evidence does not support the latter. We introduce evolutionary game theory and the main equilibrium concept, evolutionary stable strategies (ESS). This is followed by a description of replicator dynamics that gives rise to ESS, and a study of its properties. A range of examples illustrate the underlying concepts. We then consider stochastic dynamics generated by an underlying source of persistent randomness and introduce a stochastically stable steady state. Finally, we consider psychological game theory in which beliefs directly enter the utility function allowing for a rigorous modelling of emotions such as guilt and shame.

This chapter discusses the difference in allocation of entrepreneurial talents in government and in commerce as well as its impact on the economy and society. The capabilities of those who engage in business activities determine not only the economic growth of a country, but also the size of enterprises, workers’ wages, and society’s morality. The chapter also discusses the type of system that is most favorable to entrepreneurial talents choosing to engage in entrepreneurial activities. Property rights protection is the primary determinant of the allocation of entrepreneurial talents between government and business. This chapter also uses the evolutionary game methodology to analyze the evolutionary equilibrium of entrepreneurial talent allocation and briefly analyzes the rise of China’s contingent of entrepreneurs over the last 40 years.