How do a Russian fiction writer’s works relate to economic theory? And does it really matter? Sao Yang Hew explains.
By mapping out the mechanics of a classic story using game theory, David Huang examines the idea of reputation, its importance and associated strategies.
If you needed $2,000 in a week, would you have enough savings? This scenario could easily become reality. For example, an emergency ambulance or a family’s flights, say for a funeral, could cost more.
Historically, the term ‘rationality’ has been ascribed various meanings within the sphere of economics. Typically, rationality has been expressed in terms of the idea that consumers attempt to maximise utility by arriving at an optimal decision in light of a complete set of information relating to the market in which they operate.
That is, the rational person of neoclassical economics opts for the decision that is subjectively best for that person in terms of a given utility function.[1] Consequently, neoclassical reasoning relies heavily on artificial factual assumptions such as perfect information, rather than accepting the reality of limited information and cognitive capacity in making any given decision.[2]
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.
Republished from The Conversation
By Mike Pottenger, University of Melbourne
The Holy Roman Empire, 1704: Agnes Catherina Schickin slits the throat of a seven-year-old boy.
1746: Johanna Martauschin smashes the skull of a small child.
1753: Sophia Charlotte Krügerin cuts the throat of a nine-year-old boy.
1761: Eva Lizlfelnerin steals a baby and throws it into a river to drown.
These tales are true, blood-curdling, and perhaps more chillingly still, are the stories of people whose behaviour can be considered rational.
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?