Behavioral Game Theory

Labour leader Ed Milliband hit the headlines this week with his plans to freeze energy prices if elected into power in the 2015 UK general election. The response was pretty fervent. But can a price cap work?    The microeconomics textbook says that price caps are almost always a bad idea. To understand why it is interesting to see how labour defended the plan. Or, more properly, I should say how labour did not defend the plan. When questioned about the merits of the price freeze every shadow minister I heard reeled off a long list of reasons why the energy market is failing. What I never heard once was a minister argue that the price freeze will solve any of the market failures. And that's the problem, a price freeze will not solve any of the market failures! It will just make them worse.    For example, I heard several spokespmen bemoan the fact the market is dominated by only six firms. Put aside for the moment that six firms is more than enough for competition to work, will a

For those unfamiliar with cottage holidays, the ideas is pretty simple: You rent a house, bungalow, or beach hut for a week or more, make yourself at home, relax and enjoy. What I want to explore is how different the experience feels in the UK and Denmark.       When you arrive at a cottage in the UK you can expect ample supply of toilet rolls, kitchen towels and logs for the fire. There will almost certainly be a library of books, CDs, DVDs and local maps for you to enjoy. Bed linen is provided free of charge. At one cottage we recently went to there was a complimentary bottle of wine.      Contrast this with Denmark. Here you have to pay for any electric, water and gas you use. Don't expect any toilet rolls or kitchen towels, let alone a complimentary bottle of wine. There's no library. Bed linen, or anything else, comes with an extra charge.       Which system would you prefer? The economist in me says that I am supposed to prefer the Danish system. All the 'compl

   It is apple season for another year. The trees in the village where I live are packed full of tasty, fresh, organic apples. And, most of them are going to be left to fall to the ground and rot! Which I think is a great waste. I also think it is a great example of the sunk cost fallacy in action.     Here's the issue: Consider someone called Mark who goes out to the supermarket and buys some apples. He will almost certainly eat those apples and go out of his way to not waste them. Mark, however, ignores the apples growing in his garden and does not think twice about letting them go to waste. Why does Mark save the apples he bought and not the apples  growing in his garden?     You might say it is a difference in quality; but, the apples in my garden are easily as tasty as those in my local supermarket. You might say it is the difficulty of harvesting the apples; but, it takes seconds for me to harvest 20 apples from my garden. The difference, therefore, must be psychological