Behavioral Game Theory

At the heart of game theory is the notion that we can strip away details of a particular setting to focus on the key strategic incentives that matter. Hence, two very different looking settings can give rise to the same game. For example, contributing to charity may be strategically equivalent to not dropping litter. This stripping away of detail makes game theory a 'general theory' rather than a list of case studies. But, the constant danger is to strip away details that matter.       Framing effects are one illustration of this danger. Daniel Kahneman and Amos Tversky very powerfully illustrated that people can make different decisions depending on how a decision is framed. (See, for example, their 1981 article in Science on ' the framing of decisions and psychology of choice '.) Strategically irrelevant aspects of a setting may, therefore, matter. Recent years have seen a burgeoning number of studies looking at framing effects in public good games. The basic ques...

In 2013 a system was introduced in Wales where restaurants and food outlets were required to display food hygiene ratings for all to see. This has seemingly led to an increase in food hygiene , prompting calls for the system to be extended across the UK. But is it necessary to force restaurants to display the rating? Textbook models of signalling would suggest not. Here's why:           Restaurants are rated on a 6 point scale ranging from a cockroach infested 0 to very good 5. All restaurants have to be rated and so this is not at issue. The question is whether they should be forced to prominently display the rating. With that in mind, consider the incentives of restaurant owners:         It is easiest to start with a restaurant that got a top, 5 rating. Clearly the owners have an incentive to display the high rating and show off how good the are. So they will likely display the rating whether forced to or ...

There has been a lot of media coverage recently on the cost of attending Premier League football matches. One particular focal point was a protest by Liverpool supporters over plans to charge £77 for a ticket. In response to this protest the owners of Liverpool back-tracked and said they would keep prices pegged at current levels (where the highest price is £59). But, why should prices not go higher?           The data on Premier League attendances shows that, for the vast majority of games, stadia are full. And there is no doubt that many more would attend if they could get tickets. Such excess demand clearly means that plenty of people are willing to pay high prices. This gives a strong rationale for clubs to push prices higher and increase profit. Indeed, it is what the economic textbook says they should do.         But, the main consequence of an increase in prices is to extract surplus from supporters. Essentially supporters are p...

A recent  study by Maxwell Burton-Chelle, Claire El Mouden and Stuart West, published in the Proceedings of the National Academy of Sciences , challenges one of experimental economics most robust findings. They argue that conditional cooperation reflects subjects confusion over experimental instructions and not social preferences. So, what to make of this result?        Let me begin by providing a little background on conditional cooperation. A  study by Urs Fischbacher, Simon Gachter and Ernst Fehr, published in Economics Letters 2001, looked at how people behave in a pubic good game when they get to see the contributions of others. More specifically:         They considered a setting with 4 people. Each person could contribute up to 20 tokens into a public project. Any tokens not contributed were worth, say, $1 to that person. Any tokens contributed were worth $0.40 to everyone in t...

Evidence (albeit somewhat anecdotal) suggests than women are being asked to pay considerably more than men for almost identical consumer products. This seems to apply to clothing, toiletries, toys, even pens. Why? It is hard to believe that it costs more to produce products for women than men. So, I think we can safely discount the idea that the difference is being driven by costs. The far more likely explanation is price discrimination.       To illustrate consider a very simple example. Imagine you are the owner of a company making jeans. It costs £25 to produce a pair of jeans and you are currently selling them at £50 a pair. At this price you sell 100 a week to men and 50 a week to women. The key question you have to consider is what would happen to sales if you increase (or decrease) the price? Suppose that at a price of £55 a pair you estimate you would sell 80 to men and 45 to women. On the male side this is a bad deal because profit fa...

On Saturday rail fares in the UK rose by an average of 1.1%. This is the latest instalment in a long running trend of fair increases. Indeed, average fares have risen by around 40% over the last decade. As usual passengers were queuing up to say how disgraceful it all is. This year the opposition leader Jeremy Corbyn joined the fray with his standard call for a renationalisation of the railways. But what is the problem with high rail fares?        The main reason I ask this question is one of revealed preference . At the same time as complaining about high fares, most passengers also complain about having to stand on over-crowded trains. Indeed, use of the railway has soared , with over 70% more journeys now than in 2002. Moreover, I don't think that anyone would seriously dispute that the UK rail network has just about reached the limit of its capacity in terms of the number of trains operating.   ...

Nash equilibrium is the main game theoretic concept used in economics. Evolutionary stable strategy , or ESS, is the main game theoretic concept using in biology. The issue I want to look at here is the relationship between the two. This is an issue that appears to cause much confusion amongst students (and some academics).          The main thing that I would suggest needs to be recognised is that Nash equilibrium and ESS are fundamentally different. They were conceived completely independently with very contrasting objectives in mind. The Nash equilibrium was developed by John Nash in the 1940/50s as an equilibrium concept for non-cooperative games . And note that the genius of Nash was not so much to develop the Nash equilibrium but to recognise the importance of non-cooperative games. The ESS, by contrast, was developed by John Maynard Smith and George Price in the 1970s as an equilibrium concept for evolutionary games ...