Behavioral Game Theory

I have finally got around to reading Daniel Kahneman's book Thinking Fast and Slow . It is a fantastic read. It brilliantly sets out how Kahneman and Tversky revolutionized the way we think about human judgement and decision making. But, here's the question I was left asking myself - why has the work of Kahneman and Tversky had so little impact in economics? That question might sound bizarre given that Kahneman won the Nobel Prize for Economics (Tversky had died). As far as I can see, however, the insights provided by Kahneman and Tversky have largely been ignored. So, what's gone wrong?         In his book Kahneman points to prospect theory as one idea economists have endorsed. True enough, their paper on prospect theory is one of the most cited papers in economics. Cites, however, are different to real impact. And very, very little research in economics has properly applied prospect theory. Indeed, given that the original paper is a pretty t...

It is the weekend of the British Open Golf Championship. And yesterday there was a fair amount of discussion about slow play. Slow play is annoying in golf because one player taking their time holds up everybody else on the course. The referees have the power to counteract this by putting a player on the clock. Which basically means the player will be timed and penalized for taking too long. Yesterday, the referees put lots of players on the clock and penalized Japanese golfer Hideki Matsuyama. A similar thing happened at this years Masters Championship where 14 year old Chinese Golfer Guan Tianlang was penalized .       What interested me about the slow play discussion was the reaction of the players and commentators. All were in agreement that play had been to slow and that 'something needs to be done about it'. But mention a name, such as Matsuyama, and all were also in agreement that 'he was treated very harshly'. That sounds contradictory. There were only 40...

We have just got back from the PET13 conference in Lisbon. On the day of our arrival in Lisbon we were tired and hungry and desperately seeking food. A stroll in the vicinity of the hotel finally revealed a local corner shop selling fruit and essentials, and we were saved. We were also pleasantly surprised by the price. Our expectation was to pay a lot, because we'd bought a lot and because the shop owner was presumably going to rip off the unknowing tourist. It was pleasant surprise, therefore, when the bill came in well below our expectations.        In all likelihood the shop owner did add a bit of 'unknowing tourist profit' to the price. But who cares? We, as customers, were very happy to pay the price we did. And the shop owner was presumably happy to charge the price he did. Everyone is a winner. Indeed, this is a textbook story of exchange - a buyer and seller exchange goods for mutual benefit. From a textbook point of view, the really curious thi...

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...