The role of theory of mind in economic decision making

Theory of mind (ToM) is a concept that is not often considered in economic decision making. However, it could be of importance. This literature review focuses on ToM in economic decision making by answering the following research question: “What role does ToM play in economic decision making?” Specifically it focuses on game theory, looking at the ultimatum game, the dictator game and the prisoner’s dilemma. It is unclear whether ToM plays a role in every form of economic decision making, but in general people with a more developed ToM seem to be better at making strategic decisions, both as proposer in the ultimatum game and in the prisoner’s dilemma, probably because people with a well-developed ToM have a better understanding of how other people think and react, and can take this into account when making a decision. On the responder side of the ultimatum game it is again unclear whether ToM plays a role, but if it does this is probably because people with a more developed ToM have a greater sense of fairness. In the dictator game ToM may play a role, because people with a more developed ToM have a better understanding of other people’s disappointment and have a better idea of how their decisions can affect other people’s view of the person. Examples are given of how the findings from these simple games can be important for more complicated economic decisions.