Unit 4 Flashcards
Why can altruism alter game theory predictions?
sometimes altruism ruins the accuracy of game theory based predictions, we tend to assume strong self interested preferences, but in some cases individual may have social preferences.
What is game theory used for?
To model social interactions
Social preferences =
preferences which place value on what happens to others, even if it results in lower payoffs for the individual.
How can free riding create suboptimal dominant strategy equilibrium?
- imagine 4 farmers deciding whether to contribute to irrigation project
- Cost = £10
- Benefits from each contribution = £8
For each farmer dominant strategy is to not contribute so there is a loss
How can you solve the free rider problem?
Altruism could help to solve the free rider problem, as if farmers cared about wellbeing of other farmers - may contribute.
What are decisions mainly affected by?
- social norms
- Reciprocity
- Altruism
- Fairness
- repeated interactinos
Ultimatum game:
One shot game, sequential game.
If we assume rational behaviour from a purely economic perspective, any offer above £0 should be accepted, as it is more than the reservation option, which is £0. However, if factors like social norms, reciprocity and fairness are not considered, responder may reject the offer as means of punishing the proposer.
Y>R(50-Y)
Nash equilibrium =
equilibrium point where no one player can gain through a unilateral change in strategy.
Invisible hand game illustrates
how markets may channel individual self interest to achieve mutual benefits, but dominant strategy equilibrium of prisoners dilemma game shows how independent self interested
Altruism, peer punishment and negotiated agreements all contribute to
The resolution of social dilemmas
How can you facilitate agreement?
Social preferences, norms and fairness.
