Behavioral Game Theory

In the UK budget a week or so ago the Chancellor surprised most by announcing a radical shake up of the UK pension system. According to the old system retirees, with a private pension plan, were essentially forced to buy an annuity that would smooth income over their remaining life. Under the new system retirees can withdraw the money and spend it as they wish. So, if they want to splash out on a Lamborghini sports car then fine (according to the pensions minister).             What has interested me most about the pension changes is the public reaction. Immediately, people began questioning whether it made sense to let retirees have freedom of choice. Are pensioners capable of make informed rational decisions about how to spend their savings? Will they not blow it all and be left to live out their lives on state support? To most people it seemed obvious that some might make dumb, inappropriate choices. And, for me, this illust...

Saturday morning I heard a somewhat intense debate on the radio about whether a mother should breast-feed in public. The debate was sparked by an incident in a restaurant where a breast-feeding mother was asked to ' use a blanket '. Views were completely polarized. Some, like me, thought it outrageous to criticize someone for breast-feeding in public. Others, thought it outrageous to breast-feed in public! This polarization of views is a perfect illustration of the reciprocal nature of externalities, first pointed out by Ronald Coase.         The 'textbook' picture of an externality is typically one of good and evil, like a factory polluting the water that local people drink. The clear suggestion is that the evil doer, the factory in this case, should take account of the effect they have on others. Often, however, externalities do not lend themselves to a simple good and evil. That's the case in the breast-feeding example: Some would place the breast-feeding mot...

One of the most basic and intuitive ideas that has come out of the behavioural change literature is the opt-in versus opt-out distinction. Essentially, because of psychological bias, people are likely to end up 'choosing' the default option. So if, for example, the default option is to not be opted into a pension savings plan a person is likely to end up not saving enough for retirement. This simple observation partly motivated the save more tomorrow plan that stands to revolutionise retirement saving.         A context where default options are often used strategically is check boxes on online (or hard copy) forms. Suppose, for example, you want to travel from London to Birmingham and go to book your ticket online. If you are going by train then once you've sorted out the times of the trains etc. you will be offered the chance to buy basic travel insurance. In this case the box is not ticked and so the default option is no travel insurance - you have to click a m...

Every four years, as the Winter Olympics hits town, a sizable proportion of the British population falls in love with the sport of curling. And that offers the chance to look afresh at game theory's 'first big result' - the Minimax Theorem.         Curling is often called 'chess on ice'. But, that analogy only goes so far because chess is a game of complete information and curling is not: If a chess player intends to move a bishop to E4 then we can be pretty sure he will move it to E4. He is not going to mistakenly move it to D3, and a gust of wind is not going to move it F5. Curling, by contrast, involves both skill and luck. Skill is required to put the stone where it was intended. And luck is needed because debris on the ice can deflect a stone, and so on. So, while chess is a pure game of strategy, curling is a game of strategy, skill and luck.            The fact that chess is a pure a game of strategy makes it relatively ...

The last few decades have seen a huge rise in testing and performance monitoring within the English education system. The latest installment is a call for testing of four year olds when they enter the school system. The objectives of such policies are fine enough - this one, for example, will supposedly allow teaching to be more tailored to students needs. There are, however, two big problems with testing in schools. In short these are that: (i) Tests are often poor measures of what is being assessed. (ii) Tests change incentives. Let me elaborate on each of these problems in turn.        How can you measure ability? Exams and tests provide a simple to administer measure. They provide, however, a very, very noisy measure - in other words they often give the wrong impression. And the earlier one does testing the more noisy it is surely going to be because children naturally develop at different speeds. The fact, though, that tests can be wrong is not, in itself, a...

Over christmas I had chance to read the book Running with The Kenyans by Adharanand Finn. In short the book is about a British guy's experience of immersing himself for six months in the Kenyan running culture. A recurring theme throughout the book is the question of why Kenyan's have come to dominate long distance running. The answer clearly depends on a number of things like high altitude, running to school etc. But the main thing seems to be a culture of running. Kenyans run because that is what Kenyans do. So, what has that got to do with economics?        There can be no doubt that Kenyan athletes take running very seriously. In other words they put in hours and hours of training (and perhaps more importantly put in hours and hours of dedicated rest). An economist would think of this as human capital formation. All the hours of dedication to running are about the person improving their ability to run fast so that he or she can eventually win some r...

We've not long got back from a skiing holiday in the Swiss Alps. And one thing that caught my attention (particular as our trip coincided with Michael Schumacher's accident) was that everyone skiing was wearing a helmet. When I was learning to ski 25 years ago nobody wore a helmet. So, how did society go from 0% wearing a helmet to 100% wearing one?       The obvious answers if you read the economic textbook would be that: (i) ski helmets have got cheaper, or (ii) ski helmets have become better - lighter, safer etc., or (iii) skiers are better informed about the benefits of wearing a helmet. Personally, I think we can safely ignore all three of these as the main causal factor. To argue the point I would compare skiing with cycling and rock climbing. Over the timespan I'm looking at here I would guess that helmet usage in cycling and rock climbing has stayed pretty much constant - and nearer to 50% than 0 or 100%. Yet skiing helmets are essentially somewhere in-between ...