Behavioral Game Theory

Last week I had the pleasure of attending the Rebuilding Macroeconomics Conference with a theme of Bringing Psychology and Social Sciences into Macroeconomics. The basic question of the conference seemed to be ‘how can we avoid another financial crisis’ or, from a different perspective, ‘how can we avoid not predicting the next financial crisis’. There was an impressive roll call of speakers from economics, psychology, anthropology, neuroscience, sociology, mathematics and so on with their own take on this issue. Here are a few random thoughts on the conference (with the acknowledgement that I didn’t attend every session). I was most at home with the talks from a behavioural economics perspective. But it was still great to get extra insight on how this work can be applied to macroeconomics. For instance, Rosemarie Nagel and Cars Hommes gave an interesting perspective on how the beauty contest has real world relevance. Most economists are familiar with the basic idea – people ind

In a previous blog post I looked at social vale orientation (SVO) and one method to measure it, namely the decomposed game or ring technique. Here I will look at a second way of measuring SVO called the slider method . This method, due to Ryan Murphy, Kurt Ackermann and Michel Handgraaf is relatively new and has some nice advantages. While most existing studies use the ring technique I would expect the slider method to become the method of choice going forward. So, it is good to know how it works.  Recall that the basic idea behind social value orientation (SVO) is to gain a snapshot of someone's social preferences. Are they  selfish  and simply do the best for themselves without caring about the payoff of others? Are they  competitive  and want to earn more than others (even if that means sacrificing own payoff)? Are they  inequality averse  and want to earn the same as others? Or are they  pro-social  and want to maximize the payoff of others?  One way to categorize SVO is

A recent paper by David Gal and Derek Rucker in the Journal of Consumer Psychology sets out a strong critique of loss aversion - one of the most 'successful' and basic ideas in behavioural economics. So, do we really need to ditch loss aversion? Well the first thing to point out is that the paper by Gal and Rucker is considerably milder than a blog-post on Scientific American, by David Gal, that has got a lot of publicity. Personally, I would agree with a lot written in the paper but disagree with just about everything in the blog-post. So, what are the issues? Loss aversion says that losses loom larger than gains. In their paper, Gal and Rucker basically argue that losses do not always loom larger than gains. Fair enough. Indeed, this, of itself, is not particularly new. But, the 'standard' way of dealing with this 'problem' is to move around the reference point so that losses are no longer losses. For instance, Novemsky and Kahneman in a 2005 paper on &#

Using the workplace as an example, consider someone called Jane who interacts with different people over time on collaborative projects. For instance, this week she is working on a project with Sam, next week she is going to work on a project with David, the week after a project with Sam, and so on. The question of interest is whether her experience, say, working with Sam influences how she behaves when working with David? This, in turn, gives us some idea of how norms can emerge and evolve within a particular workplace. Can, for example, one slacker ruin productivity across a whole firm? To make things more concrete suppose that the basic choice Jane has to make is how much effort to exert on a project. She can cooperate or slack. We can then think of a project as either a public good game or minimum effort game. In both games the best outcome for the group is mutual cooperation. The differences lie in individual incentives. In a public good game Jane maximizes her material payof

Last Sunday the sun was out and the children's playground was full of kids and their families. As usual the ice cream van was nearby with a steady stream of willing customers. Then something unexpected happening - another ice cream van turned into the car park. What would happen? Well, the driver saw he was not alone, turned around and left. So, we missed out on any particular excitement. Even so, this brief encounter is a nice illustration of the concept of contestable markets.     The standard textbook typically associates the extent of competition with the number of firms in the market. A monopoly has one firm and perfect competition has a large number of firms. Simple enough. But, also misleading, bordering on plain wrong. It is more accurate to measure competition, not by the number of firms, but by the restrictions on entry to the market and the standardization of goods in the market.     To illustrate the issues consider our ice cream van. Suppose the local council ha

The basic idea behind social value orientation (SVO) is to gain a snapshot of someone's social preferences. Are they selfish and simply do the best for themselves without caring about the payoff of others? Are they competitive and want to earn more than others (even if that means sacrificing own payoff)? Are they inequality averse and want to earn the same as others? Or are they pro-social and want to maximize the payoff of others? SVO is a tool most closely associated with social psychology, but there is no doubt that it has a useful role to play in economics. A contribution that should be particularly interesting to economists is a recent meta-analysis published in the European Journal of Personality by Jan Luca Pletzer and co-authors. The analysis provides evidence on the connection between SVO, beliefs and behavior, which could feed into debates around reciprocity and psychological game theory. But I'm not going to talk about that study yet. Instead, I will do a co

One of the more famous and intriguing results of game theory is that cooperation can be sustained in a repeated prisoners dilemma as long as nobody knows when the last game will be played. To set out the basic issue consider the following game between Bob and Francesca. If they both cooperate they get a nice payoff of 10 each. If they both defect they get 0 each. Clearly mutual cooperation is better than mutual defection. But, look at individual incentives. If Francesca cooperates then Bob does best to defect and get 15 rather than 10. If Francesca defects then Bob does best to defect and get 0 rather than -5. Bob has a dominant strategy to choose defect. So does Francesca. We are likely to end up with mutual defection. But what if Bob and Francesca are going to play the game repeatedly with each other? Intuitively there is now an incentive to cooperate in one play of the game in order to encourage cooperation in subsequent plays of the game. To formalize that logic suppose that

How many subjects should there be in an economic experiment? One answer to that question would be to draw on power rules for statistical significance. In short, you need enough subjects to be able to reasonably reject the null hypothesis you are testing. This approach, though, has never really been standard in experimental economics. There are two basic reasons for this - practical and theoretical.  From a practical point of view the power rules may end up suggesting you need a lot of subjects. Suppose, for instance, you want to test cooperation within groups of 5 people. Then the unit of observation is the group. So, you need 5 subjects for 1 data point. Let's suppose that you determine you need 30 observations for sufficient power (which is a relatively low estimate). That is 30 x 5 = 150 subjects per treatment. If you want to compare 4 treatments that means 600 subjects. This is a lot of money (at least $10,000) and also a lot of subjects to recruit to a lab. In simple term

I have finally got around to reading Richard Thaler's fantastically wonderful book on Misbehaving . One thing that surprised me in the early chapters is how Thaler backs expected utility theory as the right way to think . Deviations from expected utility are then interpreted as humans not behaving 'as they should'. While I am familiar with this basic argument it still came as a surprise to me how firmly Thaler backed expected utility theory. And I'm not sure I buy this argument.  To appreciate the issue consider some thought experiments. Thaler gives the following example: Stanley mows his lawn every weekend and it gives him terrible hay fever. I ask Stan why he doesn't hire a kid to mow his lawn. Stan says he doesn't want to pay the $10. I ask Stan whether he would mow his neighbor's lawn for $20 and Stan says no, of course not. From the point of view of expected utility theory Stan's behavior makes no sense. What we should do is calculate t