Behavioral Game Theory

Travel agents have recently reported a new money making scam . The basic idea is to set up a bogus website selling chalet holidays in ski resorts, or to more simply sell a chalet holiday that does not exist. This scam particularly caught my attention because we often book online chalet holidays! And the emotions reading about it aroused were primarily ones of fear and mistrust - this could happen to us and so maybe we should not buy holidays online anymore. The costly-to-fake principle is a nice way to try and make sense of all this.        In any economic transaction there is an element of uncertainty, because you cannot have perfect trust in the person you are trading with. When we book a ski holiday we have to put some faith in the travel agent to deliver what is being promised. Similarly the travel agent has to put faith that we will pay on time and not trash the chalet. Ideally we would like to reduce uncertainty as much as possible by trading with people we ...

Depending on where you live the Sony PlayStation4 is either available or will be soon. Microsoft's Xbox One will follow shortly. Reviewers argue over which is best in terms of graphics, controller and the like, but the general consensus seems to be that they are pretty similar. They are not, however, similar in price! The PlayStation4 is around $100 cheaper than the Xbox. Of course, making like for like comparisons on price is difficult because Microsoft are offering things Sony are not and vice-versa. But, even so it is interesting to explore why Sony might want to come in with a lower price.       Let's start by supposing Sony has a monopoly - they are the only games console maker. Sony has to set a price to sell the console and a price to sell games. In the parlance of micro theory this is a two part tariff where the console is a fixed cost and the games are a user cost. To make the most money Sony should set the price of games equal to marginal cost...

A report published last week by the Waste and Resources Action Programme (Wrap) showed that British families are throwing away around £60 worth a food a month. This report comes hot on the heels of figures from supermarket giant Tesco showing it generated almost 30,000 tonnes of food waste in the first six months of the year. Apparently 68% of bagged salad ends up in the bin, and 20% of bananas. Clearly, this does not look like an efficient outcome. Which raises questions about why it happens and how we can stop it.       To most the answers seems obvious - consumers are making biased choices and need help to stop doing so. For example, food journalist Joanna Blytham is quoted as saying consumers are being 'ripped off' by supermarket promotions: "What we could say to consumers is 'wise up' ..... The minute you walk into the supermarket you may be able to get a few bargains but, more likely than not, you'll be nudged into buying stuff you didn't really...

The median voter theorem is a workhorse of public choice and helps make sense of political manoeuvrings. Informally, the theorem says that if preferences are single peaked then the median voter will be on the winnings side of any majority vote. To say that preferences are single peaked essentially means that the vote is on a 'one dimensional issue' whereby that the closer is the outcome to a person's ideal then the happier they are. This naturally lends itself to talking of left wing, right wing and the centre ground. The median voter is then the person in the middle. And that is why the median voter will always be on the winning side: If the median voter prefers the 'left wing' option then the median voter and everyone to the left will vote for that option and it has a majority. Similarly, If the median voter prefers the 'right wing' option then the median voter and everyone to the right will vote for that option and it has a majority.   ...

The anchoring effect recognizes that people's judgements (and choices) can be biased by things they come across before making the judgement. The most well known discussion of the anchoring effect is due to Ariely, Loewenstein and Prelec and their paper entitled 'Coherent arbitrariness: Stable demand curves without stable preferences' . Through six experiments they showed that valuations and experiences can be influenced by arbitrary anchors.     The first experiment that they discussed is the one that typically grabs the headlines. Subjects were shown six different products - a computer mouse, keyboard, average wine, fine wine, Belgian chocolates and a book. Having been introduced to the products, subjects were asked if they would buy each product for a dollar amount equal to the last two digits of their social security number. So, if the last two digits of your social security number are 52 you would have needed to say whether y...

Labour leader Ed Milliband hit the headlines this week with his plans to freeze energy prices if elected into power in the 2015 UK general election. The response was pretty fervent. But can a price cap work?    The microeconomics textbook says that price caps are almost always a bad idea. To understand why it is interesting to see how labour defended the plan. Or, more properly, I should say how labour did not defend the plan. When questioned about the merits of the price freeze every shadow minister I heard reeled off a long list of reasons why the energy market is failing. What I never heard once was a minister argue that the price freeze will solve any of the market failures. And that's the problem, a price freeze will not solve any of the market failures! It will just make them worse.    For example, I heard several spokespmen bemoan the fact the market is dominated by only six firms. Put aside for the moment that six firms is more than enough for competition ...

For those unfamiliar with cottage holidays, the ideas is pretty simple: You rent a house, bungalow, or beach hut for a week or more, make yourself at home, relax and enjoy. What I want to explore is how different the experience feels in the UK and Denmark.       When you arrive at a cottage in the UK you can expect ample supply of toilet rolls, kitchen towels and logs for the fire. There will almost certainly be a library of books, CDs, DVDs and local maps for you to enjoy. Bed linen is provided free of charge. At one cottage we recently went to there was a complimentary bottle of wine.      Contrast this with Denmark. Here you have to pay for any electric, water and gas you use. Don't expect any toilet rolls or kitchen towels, let alone a complimentary bottle of wine. There's no library. Bed linen, or anything else, comes with an extra charge.       Which system would yo...