Behavioral Game Theory

The willingness of skiers to leave their skis lying about outside of mountain restaurants has always intrigued me, even as a young child. Skis are expensive, there is a vibrant second hard market, and given that most skis look similar it would be easy enough to do the 'sorry I thought they were mine' trick. It would just seem so straightforward to 'make a business' out of stealing skis! Yet skiers still leave their skis lying about. And in Switzerland they seem to leave everything about - helmet, boots, rucksack. It is the equivalent of students at the university canteen leaving all their i-phones, laptops etc. laying about outside (without any passwords).           That skiers are trusting, and seemingly deserving of that trust is wonderful. It frees everyone up to enjoy the mountains rather than worry how to padlock their skis to a slopestyle rail. Our willingness to trust is, though, a real...

Before Christmas there was a bill brought before parliament that would force large companies to disclose any pay gap between men and women. The bill has no chance of being implemented before the general election and so was largely symbolic. It still, though, raises some interesting questions. The law already requires that men and women receive the same pay for the same job. The purpose of this new bill was largely to try and enforce that rule. Would it work?           I do not think so. To see why consider a hypothetical firm with the workforce summarized in the table below. There is a huge pay gap of £16,500 between the average man and woman. What's causing that? (a) Men are more likely to have 'higher' positions in the firm - senior managers are disproportionally male and cleaners disproportionally female. (b) In higher positions men get more than women - a male senior manager gets £20,000 more than a female counterpart. ...

As the Russian economy heads towards tough times Putin seems to be pulling up the drawbridge. If Russia is going to prosper then, so the logic goes, it needs to rely less on foreigners and more on itself. This is a familiar nationalist argument that long pre-dates Putin. But it is one that economists have long tried to counter with the logic of comparative advantage.         Simply put comparative advantage says that a country should produce what it is relatively good at. To give an example suppose that both a barrel of oil and a tablet computer sell for $100 on international markets. If it costs Russia $40 to produce a barrel of oil and $100 to produce a tablet then Russia should produce oil because this is where it has a comparative advantage. Crucially this logic holds even if Russians only want tablets. For instance, with $400 of cash they can produce 10 barrels of oil and trade these on the mark...

Stamp duty is a tax on house purchases. And it will surely go down in history as one of the most badly designed taxes ever. Why? Because, until last week, the tax operated in bands that applied to the full purchase price. For example, if a house sold for £249,999.99 then it was taxed at a rate of 1% meaning a tax of £2,500. If the price increased by two pence to £250,000.01 then it was taxed at a rate of 3% meaning a tax of £7,500. So, a two pence rise in purchase price meant a £5,000 increase in tax!          Clearly such a tax is highly distortionary. No one was going to buy a house for £251,000. House prices, therefore, inevitably clustered at the bands of £125,000, £250,000 and £500,000. There was also the clear incentive to circumvent the tax. For instance, to buy a house for £249,999 but then agree to pay £10,000 for the living room curtains.      ...

The death of Australian cricketer Phillip Hughes shocked everyone. It serves as a powerful reminder that safety at work, whether it be the sport's field or a gold mine, is not something that should be left to the discretion of individual workers. This point has been most powerful made in recent years by Robert Frank whose argument rests on the notion of positional externalities.              To illustrate the point consider the game below where two cricketers have to independently decide whether to wear a helmet. The best joint outcome is for them to both wear a helmet (and get a payoff of 10 each). There is, however, an advantage - this is the positional externality - from not wearing a helmet when the other cricketer does (and get 12 to his 0). The advantage comes from increased performance or, in economic speak, from increased productivity and the consequent higher wage. This ...

This week's edition of the economist had an interesting article  on the knock-on effect the Ebola outbreak is having across Africa. Safari bookings, for instance, are dramatically down on previous years. This seemingly makes no sense: the traditional safari hotspots are further away from and less connected with the effected areas than most European capitals. Through the lens of bounded rationality, however, such an 'ignorance epidemic' is much easier to explain.        To explain, consider the Jackson family deciding where to go on holiday this year. Suppose that a safari in Tanzania is the best. Then, in the world of the economic textbook, a safari maximizes utility and the Jacksons would set off for Africa. And reality?         Deciding where to go on holiday is undoubtedly going to be a difficult choice because of the almost limitless possibilities to...

I recently attended a conference session that ended with a debate on whether social preferences should be taken into account when measuring social welfare. That might not sound like a particular exciting issue but I think it's an interesting and important one. So, lets look at the issues.          We can all agree on the idea that social welfare should guide policy. A policy can be considered good if and only if it improves social welfare. The difficulty is measuring social welfare. How can we reconcile the differing desires and preferences within a population? How can we take into account the desires and preferences of future generations who will be influenced by a policy? And so on.            The presence of social preferences, such as envy and altruism, muddies the waters even more as the following example illustrates. R...