Behavioral Game Theory

One thing that causes a lot of confusion, both in popular and academic debate, is the distinction between a pure public good and common resource good. Concepts like tragedy of the commons, prisoners dilemma, and free-riding get used far too liberally, and often incorrectly. So, here is one way of trying to untangle the differences:           Suppose that I decide, out of the goodness of my heart, to provide a 'gift' to my local community. For example, I build a children's play-area, or renovate the village hall, or play very loud grunge music. This is a form of public good in the sense that it is non-excludable - anyone in the village is free to enjoy my gift. What distinguishes between a pure public good and common resource good is rivalry in consumption - does one person's enjoyment of my gift depend on the number of other people who make use of the good. Here are some examples: Loud music is a p...

The Paris Climate Change Conference last December was hailed as a great success. As countries signed the Agreement in April there seemed an even stronger sense of optimism. UN Secretary-General Ban Ki-moon was quoted as saying: "Paris will shape the lives of all future generations in a profound way - it is their future that is at stake."  A recent article in Nature entitled 'Paris Agreement climate proposals need a boost to keep warming well below 2°C' provides a more sombre and depressing view. And the sad reality, is that the Paris Agreement is probably a step backwards, not a historic step forwards, in the fight against climate change.           The goal of previous climate agreements, like the Kyoto Protocol, was to provide binding commitments to reduce dangerous emissions. Kyoto, and all attempts at a follow up agreement, failed dismally to work. But, at least the objective was a sound one - to ta...

On the 23rd June the UK held a referendum on its membership of the EU and 52% of voters decided we should leave. To put things bluntly - this was the wrong decision. Politicians of all persuasions, however, have been queuing up after the vote to say that we must respect the 'democrat will' of the people. Clearly they do not have much choice, at this stage, given that a majority voted to leave. But, can we really talk of this referendum result as 'democratic'? I don't think so.           To make the case we can start with the impossibility theorems. These theorems, of which Kenneth Arrow's is the most famous prove that there is no voting mechanism that is guaranteed to produce outcomes satisfying some basic desirable properties. For instance, the choice made can be critically influenced by the options on the ballot paper (even if we add options people do not like). There are two basic ways to interpret the impossibility theorems. One...

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...