Lecture 8 Flashcards
Social interaction
- A situation in which the actions taken by each person affect other people’s outcomes as well as their own
- Sometimes when people act in their own interest, the outcome of a social interaction is beneficial for everyone
- Other times people acting in their own self interest leads to detrimental outcomes for society (social dilemma)
- We use games to model social interactions
Payoff matrix
A payoff matrix summarises the benefits that each player receives for every combination of actions that could hypothetically occur
Best response
Action that will give a player the highest payoff given the other players choice
Dominant strategy
Action that yields the highest payoff for a player no matter what the other players do (a player may not have a dominant strategy)
Nash equilibrium
Mutual best responses
No incentive to change your current action given what everyone else is doing
Every game has at least 1 equilibrium
Tragedy of the Commons
Is an example of a social dilemma (outcome when everyone pursues their own interests is worse than the cooperative outcome)
Social preferences
- A person with social preferences cares not only about how their action affects them personally but also about how it affects other people
- The ultimatum game is a common way to study social preferences
Altruism
The willingness to bear a cost in order to help another person
Reciprocity
Actions depend on evaluation of other players motives
Inequality aversion
Dislike of unequal outcomes even if you benefit
Public good
Non rival and non excludable
Conspicuous consumption
- The purchase of goods or services to publicly display one’s social and economic status
- It is an example of social dilemma
Veblen effect
A negative external effect that arises from the consumption of goods that convey social status or income
