The All-Seeing Eye

Musings from the central tower…

Panoptic Power and Competition

It is fairly uncontroversial in classic economic theory that free and fair competition is often vastly more productive than limited competition or no competition.  Many economists view a monopoly as a market failure and believe that anti-trust laws must be created and enforced in order to preserve competition.  So-called “no-bid contracts,” in which firms are granted lucrative government contracts based on cronyism rather than competition, are slammed, correctly, for costing a great deal more money than competitive contracts would cost.  As a general rule, when agents compete on the market, the goods or services that the agents are selling become more productive and/or less expensive – in other words, competition allows buyers to get more for less.

How is this related to panoptic power?  Economic competition conforms closely to the panoptic model of power.  Let us compare economic competition to the two hallmarks of the panopticon:  self-surveillance, and isolation.

In the panopticon, self-surveillance is produced within a subject by causing that subject to behave as though at any moment she might be under surveillance by a central observer.  Who is the central observer of the competitive market?  The consumer.  At any time, the consumer might evaluate the quality of the products offered up for sale by the competitors.  Competitors earn reputations based on the quality of their products, and these reputations greatly affect the profits of the competitors.  The consumer is also somewhat unpredictable, in that one never knows exactly what a consumer’s preferences might be.  Perhaps your innovative new product might become the next iPod – or perhaps it might become the next Betamax. Competitors must strive towards innovation and invention and reinvention, and must also master marketing, and still success is not guaranteed.  The point here is that competitors are always being evaluated, and they may live or die based on the results of these evaluations.  This is a powerful incentive towards self-surveillance.

In the panopticon, isolation is caused by physically separating prisoners in individual cells.  In a competitive market economy, isolation comes in the form of patents, trade secrets, and the information asymmetries that arise when competing agents each try to find and maintain a competitive edge.  If you own a restaurant, you might make the best marinara sauce in the county, but if you give away your secret recipe, that will not be the case for long.  Isolation also comes from the fact that individual agents may earn more profits through competition than through cooperation – because there will be fewer people to share the wealth.  Laws against cartelization and other forms of corporate cooperation can produce isolation effects.  In a situation where workers are competing for jobs, the workers may become isolated from each other because some wish to go on strike for higher wages while others wish to take over their jobs.

If the productive power of a competitive market is related to the productive power of the panopticon, then do the same downsides exist?  Sure.  One of these is that PD-like situations may arise in which competitors end up reaching a suboptimal equilibrium state because of their isolation.  An example of this is an industry in which advertising costs comprise a significant percentage of the industry’s income but do not effect a significant redistribution of market share for any one firm nor attract a significant number of new buyers to the market.  Each firm would be better off if no firm advertised, but if any firm advertises, they all must in order to avoid losses.  In the end every firm advertises, and the entire industry essentially throws money away.  The tobacco industry is one such example (although you won’t hear me mourning their suboptimal profits.)  There are also cases like railroads or utilities where, without collusion or intervention, redundant services may be established (imagine the case of two competing rail lines running parallel to each other).

Because the effects of panoptic power are generally experienced as difficult and unpleasant, free markets tend toward a mix of competition and cooperation.  Many agents would like to collude with each other in order to avoid the panoptic effects – in other words, break isolation to resist the power of the panopticon.  A cartel is a good example of this – competitors get together and decide that rather than compete with each other, they’ll fix prices and production at a certain level so they can all profit equally.  These cartels often result in higher prices and lower quality and quantity for goods produced – they are less productive, but they make things easier for those involved.  Labor unions are a form of cartel for workers, who agree to band together to achieve higher labor prices (wages) and shorter working hours (less production).  Such cartels and unions suffer from the risk that one agent will defect or a new agent will enter the market, thus destroying the cartel or union, and as a result an equilibrium can be reached.

The free market, which depends on competition for its functioning, is thus an example of panoptic power at work.  This is an important insight because many experience panoptic power as something which imprisons them, which calls into question how much “freedom” agents in the free market actually have and provides a theoretical framework to contrast, rather than conflate, liberty and productivity.

October 25, 2008 Posted by | Economics, Power | , , , , , , , | Leave a comment

Monopoly

The name of the game is Monopoly.  The object of the game is to win.  You win by having the most net worth at the end of the game or by being the last player left after all other players have gone bankrupt.

Basically, your goal is to collect money and property – as much as possible, by any means available.

Most people are probably familiar with Monopoly, which makes it a good example for a thought experiment.

Imagine that four friends are playing Monopoly and a fifth friend shows up and asks to get into the game even though some number of turns have already passed.  How can this fifth friend be integrated into the game?

One way is to start the person the way everyone else started: at Go, with $1500 and a pair of dice.  The beginning is the logical place to start, after all.  This method presents problems, though.  The four original players have had many turns to increase their wealth and their earning potential.  Many good properties have already been bought.  Monopolies may have already been established.  Depending on how late in the game it is, this fifth player may be at some great disadvantage.  Imagine if 90% of the properties on the board are already owned.  The fifth player has virtually no chance of winning – of surviving on the board – under these circumstances.

Another way is to grant the person some portion of the money/property on the board.  You could total the value of the properties each player owns, average the totals, and then randomly assign the new player  unowned properties until that average is approximated.  You could do the same for money.  However, if there isn’t enough unowned property to do this, you’d have to take property away from some of the players who are already playing.  How can this be done fairly?  Should the property be taken from the winning player(s), or equally from all?

Another way is to simply restart the game.  This isn’t necessarily fair to the players who were doing well – their good luck and good strategy ends up going unrewarded.  However, the player(s) who think(s) he/she/they would have won can at least declare victory in this case.  In my experience, this is the most commonly chosen option for inserting a new player into an existing game, for the simple reason that usually at least half of the players are not winning and usually the choice of methods comes down to a loosely democratic vote:  All of the players who are losing choose to restart.

Aside from the highly practical use that this line of thinking has in actually inserting new players into existing games – a situation I have encountered in life from time to time – we can also consider the larger implications, like when we insert new players into the more realistic economic systems presented by, for instance, the economy.  Imagine, for instance, that half the population of some country was playing some game analogous to Monopoly – attempting to acquire money and property and personal enrichment – for years, or decades, or centuries.  Imagine then that the other half demanded to be inserted into the game.  How would we fairly insert these newcomers?

Obviously this question is not simply theoretical.  Various large population groups have been granted property rights in our history – women, for instance, and African Americans – rights which amount to $1500 and a pewter thimble.  These groups were then allowed to compete freely with the people who already owned almost all of the property, people who were busily going through the Monopoly winning strategies of bankrupting whoever they could and consolidating and developing their assets.

Just letting someone into the game doesn’t establish fairness.  These groups weren’t really given a chance.  Even those who did start off with some property – many former slaves were given land during Reconstruction, and women could always inherit an estate from a husband or father – were still at a disadvantage.  Imagine starting a game of Monopoly with a house on Baltic Avenue when another player has hotels on Boardwalk and Park Place.

In the game of the American economy, women, African Americans, and immigrant groups have had to claw their way up from the bottom with the help of luck, charity, and government aid.  It’s no wonder that the players who are already winning want to deny entry to immigrants, why they fought to keep women from having the right to own property.  It’s no wonder that the players who aren’t doing so well want to restart the game and distribute everything evenly.  But when we assess some data – the wage gap between men and women, for instance – it’s important to keep in mind that some of the players started late.  If women owned half the property and controlled half the wealth in the American economy, would there still be a wage gap?

And before we say that some group has had enough opportunity to improve their lot, let’s ask ourselves how many turns we would need before we caught up in a game of Monopoly if we started fifty turns late.

Again, no solution presents itself.  What is fairness?  How can all players be satisfied with a solution?  Certainly whatever happens, it will require the cooperation of people who don’t currently acknowledge that there is a significant problem with how the game was set up in the first place.

June 4, 2008 Posted by | Economics, Feminism, Game Theory | , , , | 3 Comments

Economics Foundation

One of my goals in this blog is to examine the interplay between certain postmodern theories and certain economic theories that, due to certain political and demographic realities, might never be considered together. In Constituting Feminist Subjects, Kathi Weeks points out that there is a “paradigm debate” between modernists and postmodernists that makes it difficult to constructively combine elements of, for instance, Foucault and Marx. However, someone whose area of interest is feminist politics would be highly likely to, in their course of study, come across somewhat favorable accounts of both of these thinkers. Perhaps socialist feminism and postmodern feminism would be presented as opposing movements, but they oppose each other only in their approach to meeting ostensibly similar goals. Thus the logic of Weeks’ attempt to bring some degree of reconciliation to the two.

This same student of feminist thought would be very unlikely to encounter certain other
theories, thinkers, or schools of thought, or if they were encountered, they’d be likely to be presented negatively, misrepresented, or dismissed as irrelevant for one reason or another. This is not an attack on the feminist movement – merely an observation that, in any movement or school of thought, there are areas of particular interest that are studied in great depth, and there are areas of no particular interest that are not studied at all. I could easily level the same critique against economics. In fact, I arguably already have, when I said that Libertarian thought needed to be reevaluated in the face of certain postmodern theories. I’ve spoken a bit about some of the formulations of power that will inform this project of deconstruction and reconstruction, so now, I’d like to talk a little bit about the economic side of things. My project here is to begin to lay the foundations for my postmodern theory of economics.

Continue reading

March 2, 2008 Posted by | Economics | , , , , , , , , , , , , , , , , , , , , , , , , | 1 Comment

Organized Labor: A Power Analysis

One place where the question of power has had a great effect on society is the relationship between employer and employee. Marx portrayed this as a class struggle, between the proletariat – those laborers whose physical activities produced value in the economy – and capitalists, whose role is to organize the activities of those laborers. Marxism generally holds that the capitalists do not produce value through their activities, and instead exploit the laborers by making profits (that is, unfair monetary gain) from the work of the laborers, who receive wages worth less than the value of their work.

The question Marxism must answer, then, is: how do the capitalists maintain this exploitation, if they are indeed adding nothing of value? Why do the laborers allow the capitalists to exploit them? Clearly, the capitalists must have some power over the laborers.

What is the nature of this power? To begin, the capitalists own the means of production. They may own land, tools, supplies, or other property that the laborers cannot obtain due to political or economic factors. Modern ownership of land goes back to feudalism, where all property rights flowed from the king, down through the nobility, and usually stopping there but occasionally ending in yeoman farmers. And of course colonial American plantations are a perfect example of workers laboring to make profits for a plantation owner who was granted the land by a monarch or the monarch’s representative. And plantation workers – often indentured servants or slaves – are a perfect example of the exploited worker who does not and cannot own property and, as a result, whose work benefits another. Furthermore, the system of property rights at the time of colonial America was so extensive that one person could own another, in the form of indenture, or slavery.

Aside from simply condemning this system as evil, it is worthwhile to analyze it further. The system of property rights is a way of organizing some or all of the things in the world (people, places, objects) so that each thing is accounted for in some way. This can be viewed from a functionalist perspective – in other words, the function of fertile land is to be farmed, and so it is up to the nobility to make sure that it is farmed so the people do not starve, and it is similarly up to the peasants to do the actual farming, for the same reason. In this way, power is not simply a tool of privilege, but a tool of productivity. As society advanced, the economy evolved, and the nobility was replaced by a more efficient system of administration. People who were better at organizing the means of production were allowed to be in charge, and to grow rich from their success, and these people are Marx’s capitalists. Capitalism proved more efficient at organizing productive power than its predecessors (mercantilism and feudalism) , but the power relationship that existed under feudalism was never really abolished. Instead, it is simply better organized.

One of the ways that the system is better organized is that it is better at sorting people based on their productive capacities. It is by no means perfect – the system is still marred by things like gender, class, and race discrimination – but it is certainly better than a system where a son of a farmer is automatically also a farmer. The system provides people with a range of options and then rewards those who choose the options that enable them to be more productive.

The individualism that comes with a system in which individuals feel that their lives are created by their choices provides a certain amount of resistance to metonymic power. Metonymic power involves a displacement of agency and an abdication of personal or individual responsibility. Individualism encourages people to take individual responsibility for their lives, and a broader range of choices provides people with a sense of agency. So in a sense, capitalism can be seen as a substitution of productive power for metonymic power – individuals become more productive (producing productive power) and also gain a sense of their own agency (reducing metonymic power). Another way of saying this is to say that the economic sphere has gained power while the political sphere has lost power.

The fact remains that under capitalism, laborers still find themselves the subjects of a form of power. The difference is that while metonymic power is explicitly linguistic (or at least semiotic) – the acting agent thinks of an action as having originated from a symbolic agent – productive power is more phenomenological: it is felt, experienced, performed, and quite difficult to express linguistically. In other words, while a peasant can express any number of symbolic agents (God, the King, his feudal lord, duty) to explain why he continues farming, and thus make it very clear that he is under the effects of a power relationship, the worker is denied these symbolic agents, and is left only with the idea that his labor is a personal choice, that he could choose to do something else, or nothing at all, that nobody is forcing him to work, and thus is told that he is the one with the power. And so we come across arguments that say that the laborer and the capitalist both have power – the capitalist offers wages, the laborer offers work, and thus an equitable bargain is struck, with no force, threat, or coercion – and the productive power that organizes the labor by organizing the laborer is obscured and hidden.

I have spoken a great deal about this productive power, but I have not yet described what productive power is. My answer, which I will elaborate upon later, is that productive power is disciplinary power, which is panoptic power, which in turn is inverted, or reflexive, metonymic power. I have teased you all a great deal with this answer, which opens up more questions than it answers. I believe my meaning will soon become clear. Continue reading

February 24, 2008 Posted by | Economics, Power | , , , , , , , , , , , , | 2 Comments

Free Will, Determinism, and Motivation

It is possible to look at the universe like a giant computer. If you know the software a computer is running and all of its inputs you can predict the result. Similarly, one might think that if you knew all the rules of the universe – that is, if you understood physics perfectly and accurately – and if you knew the position and velocity of each particle in the universe, you would be able to predict the results – that is, how everything would turn out. Such a view is called determinism. When Newton first proposed that all matter obeyed certain laws, he was accused of atheism, because the obvious implication of his theories was determinism, which is a theory that leaves no place for God and no place for free will.

The question of free will vs. predestination or determinism is, of course, older than Newtonian physics, but physics is the way in which I first conceived of the question. One might ask, if God is all powerful, how can anyone act in a way God does not want? One might ask, if God knows all, then isn’t destiny written – isn’t there no way to change things? I have never been particularly into theology, but physics always fascinated and frightened me.

Some time ago I read Isaac Asimov‘s Foundation trilogy, which despite its name consisted of approximately thirteen thousand books. This series is based upon the idea that there was a mathematician named Hari Seldon who was able to predict the course of history using mathematical models and a deep understanding of historical trends. I did not find this idea credible. People, after all, are far too complicated to reduce to a mathematical model. Aren’t they?

Can we predict what people will do in a given situation? If we can, what does that say about free will? If we can’t, how can we enact social change?

In Freakonomics, authors Levitt and Dubner describe a scenario in which parents were charged a small fee (I think it was $3) for being late to pick their children up from daycare. The result of this fee was that lateness increased dramatically. According to Levitt and Dubner, the fee was too low, and parents felt as though paying $3 justified their lateness. In other words, when no provision is made for lateness, the parents have to pick their kids up on time or risk their kids being scared and alone. When the daycare center charges for lateness, watching the kids for a few more minutes becomes just another service that the parent can buy, and buy they do. The point of this story is that incentives don’t necessarily work the way we think they will. There are complicated issues at stake even in something as simple as daycare. As we saw in the Traveler’s Dilemma, it’s not a simple task to predict how people will make their decisions, and sometimes rational behavior isn’t what theorists think is rational.

However, what both of these scenarios show is that despite the difficulty, despite the complications, it is possible to develop models and predictions for how people will behave. It is possible to find, with experimentation, the fee amount at which parents will begin picking their children up on time to avoid the fee. It is possible to find, with experimentation, the punishment amount at which people will begin picking the low number rather than the high number in the Traveler’s Dilemma. In other words, people’s behavior may be more complicated than we think, but it is not unreasonable. People act based on motivations, and although these motivations are often not obvious, they are there and they can be found.

Of course there will always be exceptions. There’s always room for free will. There will always be people on the far ends of the bell curve, people who defy expectations and act inexplicably. But in order to effect positive change in the world, we have to believe that we can predict behaviors for most people. We have to believe that there’s a number of dollars that will decrease the amount of late pickups from daycare. After all, isn’t this how we determine prison sentences? Isn’t there a number of years of incarceration that we believe will make the commission of murder unattractive to most potential criminals? Isn’t there a number of dollars that we believe will deter people from speeding and thus decrease the number of traffic accident fatalities?

I’ve never really believed in free will. I’ve always thought that everything is already determined by particle vectors, that everything I do is explainable by something that happened to me in childhood or by a set of circumstances that outlined my choice to such an extent that I didn’t really have a choice. And that’s why, for me, I think it is important for us to search for these motivations, search for these incentives, to build and discredit and rebuild these mathematical models to predict behavior. Because I want to set things up so that people have no choice but to make the right choices. I want a society full of people who pick 100 on the Traveler’s dilemma and pick their children up on time from daycare, and if we’re going to have that we have to pick the right game.

And that, in turn, is why it’s worth looking at something like the Traveler’s Dilemma and finding out that people will cooperate with each other as long as the risk for doing so isn’t too high. It’s why it’s worth looking at the daycare paradox to find out how much guilt is worth. It’s why it’s worth asking why people follow their king or their president against their best interests. We need to find out what motivates people. And in exploring incentives and economics, game theory and modeling, philosophy and psychoanalysis, that’s exactly what I hope to do. I hope to find a solution, a way to set up society so that we’re all playing a game that everyone can win.

In closing, right now I feel that most people are not playing a game that everyone can win. There’s a game called the Prisoner’s Dilemma. In this game, two prisoners are in the custody of law enforcement, but the police don’t have enough evidence to convict them of a serious crime. Each of them is told that they are both suspects and given the following options. If one prisoner gives up the other, that prisoner will go free and the other will go to jail for a long time. If neither of them confesses they will both serve a short sentence for whatever smaller crimes the police can put on them. If they both confess they’ll both serve a short sentence. The implications of the game are that it is better for each player, no matter what the other player does, to confess their crime. Unlike the Traveler’s Dilemma, the Prisoner’s Dilemma tends to lead to uncooperative behavior – in other words, it is much better for each player to screw the other player over, unlike in the TD in which screwing the other player leads to a greater loss.

The Prisoner’s Dilemma game describes many situations in modern life – situations in which people have a great incentive to hurt other people. If there is some way to change the rules of the game so that, like in the Traveler’s Dilemma, or many other games, people have an incentive to help other people, then everyone could benefit immensely. Changing the rules of the game is what I’m aiming for, but it’s going to take a lot of searching to find the right game and a lot of convincing to get people to play it.

February 10, 2008 Posted by | About, Economics, Game Theory | , , , , , , , , | 2 Comments

Traveler’s Dilemma and Opportunity Cost

As a followup to my last post, I thought now would be a good time to say some things about opportunity cost, or The OC.  Please do not confuse this with any other things called The OC.

Opportunity Cost is an economic analytical tool – a measure of the cost of a missed opportunity.  It goes like this.  Let’s say you have a dollar and you’re standing on the street at a hot dog cart.  The cart is selling pretzels for $1 and hot dogs for $1.  If you buy the hot dog, you can’t buy the pretzel.  Therefore the opportunity cost of buying the hot dog is one pretzel.  Conversely if you buy the pretzel you can’t buy the hot dog.  So the opportunity cost of the pretzel is one hot dog.  Simple, right?  At first glance this seems a trivial and reductive measure for an economist to be thinking about, but in real life, when applied to more complex situations, we can see the value of considering the opportunity cost.

Let’s try another example.  You have a dollar but you aren’t hungry, and you’ve got a year.  You can keep the dollar in your pocket and at the end of the year you’ll have a dollar.  Or you can put the dollar in a bank and at the end of the year you’ll have, let’s say, $1.05.  The average person would think that if they kept the dollar in their pocket, they haven’t lost anything, and in one sense this is true.  However, they have missed something – the opportunity to earn $.05.  The opportunity cost of holding onto the dollar was five cents.  Doesn’t seem like much, but what if it’s a thousand dollars?  A million?

The point is, when there’s money at stake it pays to consider the opportunities that you have when making choices, because in some sense, missing the opportunity to earn money is sort of like losing money, even if it’s money you never actually had.  An opportunity is worth something.  If you don’t believe me, play poker.  If you fold a hand, and it turns out at the end that you would have won if you had stayed in, you will feel like you have lost something.  What you’ve done is missed an opportunity, and the loss you’re feeling is the opportunity cost.  Folding may have been the right decision based on the odds, but you’ll still feel bad that you didn’t get the pot.

So what does opportunity cost have to do with the Traveler’s Dilemma?  Well, it’s another way of evaluating possible plays in the TD, and it demonstrates a major flaw in the models used by game theorists to “solve” the TD.

To recap, in the TD, game theory says that logically speaking, a player ought to play (2).  Many people intuitively feel that they should play higher, and (100) is perhaps the most common play, with (95) to (100) comprising the majority of plays in some experiments.  According to Kaushik Basu, (2) is the correct or best play, because of a game theory concept known as the Nash Equilibrium.  Further, (100) is the worst play, because it is the only play in the game that is “beaten” by every other play.  In other words, if player 1 plays (100) and player 2 plays anything else, player 2 will be rewarded more points than player 1.  If this logic is to be believed, (2) is a better play than (100), and people, if they are acting “rationally,” ought to play it.

But let’s look at the OC to see if that’s true.  Let’s say player 1 plays (100) and player 2 plays (2).  The rewards, then, are 0 points to player 1 and 4 points to player 2.  However, given player 2’s play of (2), the highest score player 1 could possibly have acheived by making a different play is 2, by playing (2).  Any play other than (2) results in a score of 0.  So, player 1 lost 2 points by not playing (2), or, to put it another way, his opportunity cost for playing (100) was 2 points.

Player 2, however, is in a much worse situation.  He played (2) and got 4 points.  Given player 1’s play of (100), the highest score possible for player 2 was 101, with a play of (99).  In other words, by playing differently player 2 could have gotten 101 points, but instead he got four.  That means that his opportunity cost for playing (2) was 97 points.

So, in the above example, on the face of it it seems like player 2 won – he got 4 points, while player 1 got none.  However, if you look at it a different way, player 2 lost 97 points while player 1 only lost 2.  If you consider the scale of a loss of 2 vs. a loss of 97, you see that a play of (100) is much less risky than a play of (2).

In fact, for an opponent’s play of 2, the OC of (100) is 2.  For any number between (3) and (99), the OC is 3.  And for (100), the OC of (100) is 1.  The OC of (2), however, is (Opponent’s play – 3).  That means that for any play above (6), the opportunity cost of (2) is higher than that of the opponent’s play.

So the (2) player almost always loses more money than his opponent – not that the players are losing money that they actually possessed, but money that they could have – and perhaps should have – earned.  If you ask any economist or poker player, that loss can sting just as much as a loss of cold hard cash.

The thing is, if you evaluate the Traveler’s Dilemma in terms of Opportunity Cost, the definition of improving one’s position changes, and therefore so does the Nash equilibirum.  It’s a situation where gaining money and not losing opportunity are not the same thing – and this situation probably comes up fairly often in the real economy, which is why opportunity cost is important as an economic concept.  Rational choices and selfishness, therefore, cannot necessarily be evaluated successfully using only the rubric of amassing the most gain by the end of the game.  There are other measures of success, and people do use them.  Game theorists and economists alike would do well to remember that.

January 25, 2008 Posted by | Economics, Game Theory | , , , , | 1 Comment

The Traveler’s Dilemma

Now for some real content. I came across this article in Scientific American about the Traveler’s Dilemma. To explain briefly, the TD is a game in which two players are each asked to select a number within certain boundaries (2 and 100, in the example). If both players select the same number, they are rewarded that number of points. (In the example, each point is worth $1, which makes the game of more than academic interest.) If one player’s number is lower, they are each awarded points equal to the lower number, modified by a reward for the player who selected the lower number and a penalty for the player who selected the higher number. So, for instance, if you choose (48) and I choose (64), you get 50 points and I get 46 points.

The intuition that I had upon reading the rules of this game was that it would be “best” for both players to choose (100). That is certainly true from a utilitarian point of view: (100, 100) results in the highest total number of points being given out – 200. The runners up are (99, 99), (100, 99), and (99, 100) with 198. However, there are two small problems – here’s the dilemma part – that prevent (100, 100) from being the “best” choice: one, the players are not allowed to communicate, and two, the (100, 99) and (99, 100) plays result in one player receiving 101 points – an improvement, for that player, over a 100 point reward.

So, the reasoning goes, if player one predicts that her opponent will play (100), she should play (99) in order to catch the 101 point reward. Her opponent, however, ought to use this same strategy, and also play (99), in which case player one ought to play (98) in order to trump her opponent, and so on and so forth. This reasoning degenerates to a play of the minimum number – in the example, (2). According to Basu, the author of the article, “Virtually all models used by game theorists predict this outcome for TD.”

However, reality does not follow these models. When people are asked to play the TD, many of them choose 100. Many of them choose other high numbers. Some seem to choose at random. Very few choose the “correct” solution – (2) – predicted by game theory. Something’s up.

Basu takes this to mean that all of our assumptions about rational behavior need to be questioned. With my philosophical background, I happen to have different assumptions about rational behavior than the mainstream, and so for me the results of the TD are not surprising in any way. But perhaps the best way to explain why the results to not surprise me is that I am a gambling man. Continue reading

January 24, 2008 Posted by | Economics, Game Theory | , , , , , , , , , , , | 6 Comments