Behavioral Game Theory

A few months ago the Deputy Prime Minister Nick Clegg was expounding on the benefits of a security bond for visitors to the UK . The basic idea was that visitors to the UK would have to deposit some money with the government and they would get the money back when they left. I was hoping the plan would be quietly dropped, and it seemed to have been. But, unfortunately, the story is back and now looks worryingly likely to happen. Visitors from a select list of countries, including India and Nigeria, will be expected to deposit £3,000 with the UK government if they want to visit the UK. The government's policy on immigration has been a disaster for many years, but the idea of a security bond seems to be taking up a notch the level of stupidity.         To put this plan for a bond in context we need a bit of background. A large proportion of the UK electorate is anti-immigration. The current coalition government's answer is to bow to the electorate and...

The UK's National Health Service seems to have been constantly in the news in recent months for the wrong reasons. One issue has been waiting times at Accident and Emergency Departments. The government's target is to treat 95% of patients at A&E departments within 4 hours. Whether or not the target is met has become a general indicator of pressure within the NHS. Recently the government missed the target . But, how useful are such targets?       Let us look at a hypothetical A&E department at 6pm on the 2nd July 2013. The waiting room is full of people. To be efficient we need to work out the benefit of treating each patient and compare that to the cost. The benefits and costs are shown in the diagram below. To illustrate how the benefit side works we can pick out two of the patients: David has had a heart attack and needs treatment or he will die, while Brian has sprained his ankle playing football. The benefit of treating David far exceeds that of t...

The latest issue of the Hargreaves Lansdown Investment Times arrived in the post last week. As always it was full of advice on which investment funds are good bets for your money. Adherents to the efficient market hypothesis would suggest that such investment newsletters are basically a waste of time. But, I always enjoying reading through my copy of the Investment Times. So, why can investment newsletters be useful?        To answer that question let's start by explaining why investment newsletters are supposed to be useless. The efficient market hypothesis says that stock, commodity, bond, fund prices etc. should always reflect all the information available at that time. If, therefore, a freely available, published newsletter claims 'here's a great opportunity to invest' it shouldn't remain a great opportunity by the time you get the newsletter! The person writing the newsletter, for one, has an incentive to act on the advice. By the time you get the n...

I was flicking through a magazine yesterday when I saw an advert for the travel company Great Railway Journeys. The advert caught my eye because it guaranteed that 'you'll never pay more than last-minute bookers. If we reduce a holiday price for any reason, we'll give the same saving to anyone who has already booked'. To someone brought up on the microeconomics textbook this can sound a bit weird. The textbook tells us that price discrimination - charging different people a different price for the same good - is one of the main ways a company can increase profit. So, why would a company guarantee that it will not discriminate?      Last minute deals are an example of second-degree price discrimination. This is where a company knows there are different types of buyer but cannot tell them apart. By offering a menu of packages the company can potentially get customers to reveal their type and charge them accordingly. To illustrate: Holiday makers may differ in their wil...

It is a year since Facebook launched shares on the Nasdaq. They were launched at $38 per share and now stand at a lowly $26. Anyone who bought a share would have lost 30% of their money.    At first sight this looks like a classic example of the winners curse. The winers curse captures the idea that the winner of an auction often loses money. IPOs (initial public offerings) are a textbook example of this. Here's the basic logic: If you ask 1000 investors to put a value on Facebook then the average valuation will probably be about right. But, shares are not sold to average investors. They are sold to the investors willing to pay the most. So, what really matters are the valuations of the most optimstic investors. And while the average investor will get the value about right, the most optimistic investors will not. They will overvalue the company and consequently pay too much. This is the winners curse: the investors who 'win the auction' to get Facebook shares would have ...

Earlier this week it the headlines that NICE (the National Institute for Health and Care Excellence) were recommending midwives use a carbon monoxide test to verify whether expectant mothers were smoking. Suitable fury from smokers followed. The proposal, however, is based on pretty sound economics.     The relationship between a child and parent is a principal-agent relationship. The basic idea of any such relationship is that a principal 'employs' an agent to do a 'job' for her. Its fine to interpret 'employs' and 'job' very loosely. In this case we can think of the unborn child as employing the mother to protect her growth and development. Clearly it is in the best interests of the child that the mother quit smoking, eat healthily etc. The mother, however, has different incentives. And, there were lots of mothers I heard on the radio this week determined to carry on smoking regardless. This is an example of a moral hazard problem: The agent, in thi...

One of the big problems with US health care is the large number of uninsured people. A lack of insurance is costly for the state given that someone has to pick up the bill for all necessary treatment on uninsured patients. And its costly for society given that ill health can cause personal bankruptcy for anyone uninsured.    To fix the problem you need to know what is causing it. There are three basic causes. In looking through these its useful to have the following figure to hand. On the horizontal axis we plot the publicly observable health of the person, which might include things like weight, age, illness in the family etc. These are things the insurance company will take into account when assessing risk. On the vertical axis we plot the privately known health of the person, which also takes into account things like diet and exercise. These are things the insurance company would like to know but cannot, only the person knows. Each dot in the figure is a particular person....