Behavioral Game Theory

The basic idea behind a linear public good game is as follows: You have a group of people, typically four in the lab, who are endowed with a certain of money, say $5. Each group member is independently asked how much they want to contribute towards a public good. Any dollar that is contributed results in everyone in the group getting a return of, say, $0.40.           From an individual's perspective contributing towards the group looks like a bad deal because you contribute $1 and only get back $0.40. Note, however, that from the group's perspective a contribution of $1 results in a total return of 4 x 0.4 = $1.60. So, from the group's perspective it is good to contribute. For instance, if all four group members contribute $5 then each gets 4 x 5 x 0.4 = $8. And $8 is better than $5.            'Standard economic theory' gives a very simple prediction in a linea...

One of the more bizarre aspects of the recent US Presidential election campaign was the ability of Donald Trump to tell more lies and half-truths than most of us would do in a lifetime and yet still claim that Hilary Clinton could not be trusted in office. Even more bizarre, was the fact that he got away with it! How can we possible make sense of this? Some might point to a dumb electorate. I think we can learn more by looking at guilt aversion.              The concept of guilt aversion was formally introduced into game theory by Pierpaolo Battigalli and Martin Dufwenberg with a paper published in the American Economic Review in 2007. (I should also mention a paper  by Gary Charness and Martin Dufwenberg in Econometrica in 2006.) The basic idea is that a person only needs to feel guilt if they disappoint the expectations of others . To illustrate, consider Donald Trump's 'promise' to loc...

A few days ago we heard the story of how a waitress rescued an 86 year old lady who been stuck in her bath for four days. The waitress contacted the police after becoming concerned that Doreen had not come in for her usual lunch and wine. A story with a happy ending.          A story with a not so happy ending is the infamous murder of Kitty Genovese in 1964 in New York. This murder caught the public's attention because of the supposed number of witnesses who did nothing to stop the crime. The exact details of what happened are debated . One thing is, however, for certain: Several people must have seen or heard the attack and  none of them called the police.         To try and make sense of these conflicting stories let us look at simple game theoretic model. Suppose that there is someone called Doreen that needs rescuing and there are n witnesses who can call the police. If (at least) one person calls the police then Doreen...

In economics there are two diametrically opposed ways of viewing politicians. For the most part we assume the benevolent social planner who acts to maximize social welfare. But, when it comes to specifically analysing political decision making we typically assume that politicians are just like everyone else - out to maximize their own payoff. If a politician's objectives coincide with those of society then we have no problem. But, there are, of course, lots of reasons to suppose that political and societal objectives do not coincide.           A particularly important issue is that of electoral survival. Clearly, a politician needs to get elected in order to make a living. That means it is in a politicians interest to do things that go down well with the electorate. At first sight you might think that this aligns the incentives of the politician with those of society because the politician needs to do good things to get elected. There...

Standard economic theory takes a very deterministic view of the world in that we solve for a unique equilibrium and expect that to describe what will happen. Game theory offers an alternative perspective in that most games have multiple equilibria and there is no reason to suppose that one of these equilibria is any more likely to describe what will happen than another.               For a long while the existence of multiple equilibria was seen as a 'problem'; surely the objective of economics was to say what would happen and not what might happen? Experimental economics, however, has shown that multiple equilibria are not so much a problem as a reflection on reality. When we observe two seemingly identical groups of people we often find they end up doing very different things. For instance, one group might end up cooperating and other not cooperating.    ...

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...