Unlike classical economic models, we incorporate a more sophisticated take on decision-making from behavioral economics and psychology (recently popularized by Nobel-prized winner Daniel Kahneman). Instead of always carefully reasoning their way through their decisions, our agents sometimes use intuition – a generalized “gut feeling” (or heuristic) about the best way to act that doesn’t depend on the specifics of the situation being faced. These intuitive responses have the advantage of being quick and not requiring much cognitive effect; but the limitation of being insensitive to situation.
When, on the other hand, agents do choose to think carefully, or “deliberate”, they realize whether it is in their self-interest to cooperate or not, and get to choose accordingly. But deliberation comes at a cost: thinking takes time and effort. And it can even damage your social reputation if you come off as a “calculating” kind of person.
We then use game theory to figure out the best strategy for our agents. The answer, crucially, depends on the institutional environment.
First, consider institutions that rarely provide incentives for people to cooperate (i.e., defection is the payoff-maximizing option in most social interactions) – for example, employees in companies that only reward individual achievement and don’t penalize back-stabbers. Under such institutions, the optimal behavior is to develop a selfish non-cooperative gut response, and to always go with that gut response (i.e. to never stop and consider whether future consequences exist, because they typically don’t). This lack of deliberation means that these agents won’t even cooperate in the (relatively rare) instances in which it could be payoff maximizing for them to do so.