An Aspirations-Homeostasis Theory of Interactive Decisions

Cooperation and fairness in encounters with strangers are puzzling behaviors, since they contradict the law of natural selection. Compelling evidence shows that direct and indirect reciprocity and altruistic punishment are important mechanisms for the evolution of cooperation in the long-term. For short-interaction, cooperation and fairness are explained by theories which assume that individuals have other-regarding sentiments, or that they base their decisions on perceptions of others' intentions. The present paper proposes a new theory of decisions in interactive situations. The theory retains the assumption that individuals are solely self-interested, but assumes that individuals value their outcomes relative to their aspiration levels. The proposed theory is used to derive predictions of mutual cooperation in the prisoner's dilemma game, of proposers' offers in ultimatum bargaining games, and in the sequential common-pool-resource dilemma game. These predictions are tested using experimental data. Strikingly, for the standard ultimatum game the predicted mean relative offer is the famous Golden Ratio.