In his 1936 book ‘The General Theory of Employment Interest and Money’ John Maynard Keynes outlined how rather than being independently rational, investors were often prone to erratic herd-like behaviour. He argued that macroeconomic stability is inherently vulnerable to the ‘animal spirits’ of speculators. The recent deflation of the post Global Financial Crisis (GFC) gold price bubble is a prime example of this phenomenon.
So you are presented with the following prisoner’s dilemma game. What is your choice? Most economics freshmen will have learnt that when presented with the choices of cooperation or finking, finking is the dominant strategy, and an all-fink nightmare is the only pure strategy Nash equilibrium. Against homo economicus, the cold and rational decision maker, your best bet would certainly be with finking. But against the average Joe, would you be able to assume rationality? Does the decision to cooperate necessarily imply irrationality on his behalf?