Own Interest
or
Selfishness
1.6
When there is a “repeating game” an individual
can only promote their own interest, if they are
in tune with the interest and reactions of others.
Selfishness = self destruction
Conclusive or Inconclusive?
1.13
In systems where individuals have freedom of
choice, accurate information, and the ability to
respond to feedback, no free exchanges will take
place unless both parties benefit.
Conclusive or Inconclusive?
Test the validity of Smith’s ideas and the
model of the Prisoner’s Dilemma.
Apply the Prisoner’s Dilemma model to
economics, politics, and life. (day 2)
Determine/Debate best ways to beat the
dilemma. (Day 2)
Free market principles are
based primarily on the
idea that an individual
pursing their own interest
helps the society as a
whole.
The
Impartial
Spectator
We have passions/instincts and self-preservation
We are self serving but also consider others
We wish to be loved (proper) and lovely = gratitude/pride
Not hated or hateful (improper)= resentment/guilt
The impartial spectator serves as a control mechanism and provides use
feedback to adjust our behavior.
For voluntary exchanges to occur there must be
empathy, persuasion, and mutual benefits.
The Individual
Intrapersonal
Both parties must be self and others regarding.
This will result in propriety , gratitude and
continued exchanges.
In the absences of empathy, persuasion, and
mutual benefits impropriety and resentment will
result.
Partnerships or small groups
interpersonal
In situations where there is free exchange,
exchanges will end.
The only way to continue the exchange is to
adjust or to use force to continue the exchange.
Other parties will adapt to avoid force
"one behavioral axiom, 'the propensity to truck, barter, and
exchange one thing for another,'
where the objects of trade I will interpret to include not only
goods, but also gifts, assistance, and favors out of sympathy ...
whether it is goods or favors that are exchanged, they bestow
gains from trade that humans seek relentlessly in all social
transactions. Thus, Adam Smith's single axiom, broadly
interpreted ... is sufficient to characterize a major portion of
the human social and cultural enterprise. It explains why human
nature appears to be simultaneously self-regarding and otherregarding."[4]
Society
(non-personal)
How do we organize? – we don’t
Norms, values, and mores evolve
naturally
Spontaneous order a.k.a.
Invisible hand
What is universally valued or is proper
survives .
What is not universally valued or is
improper becomes extinct.
Applies to ideas, words, and markets
(goods and services).
By directing that industry in such a manner as its
produce may be of greatest value, he intends only his
own gain, and he is in this, as in many other cases, led
by an invisible hand to promote an end which was no
part of his intention.”
“It is not from the benevolence of the butcher, the
brewer, or the baker that we expect our dinner, but
from their regard to their own interest.”- Adam Smith
Prisoner’s
Dilemma
The prisoner's dilemma is
a game that shows why
two completely "rational"
individuals might not
cooperate, even if it
appears that it is in their
best interests to do so.
In other words, the best
option for each individual
is to defect even though
collectively it is to
cooperate.
Key aspects of the story.
1. Neither prisoner knows what the other is saying or
doing. The integration is happening simultaneously
and in different cells.
2. There is no communication between prisoners.
3. It is a one time game.
4. Both prisoners know the payoffs and their desire is
to get out of jail a.s.a.p.
What is the best strategy?
0 years, 20 years
20 years, 0 years
Player 2
Defect (selfishness)
Defect
(selfishness)
Bad, Bad
Cooperate
Worst, Best
Cooperate
Best, Worst
Player 1
Good, Good
(best collectively )
Free market principles are
based primarily on the
idea that an individual
pursing their own interest
unintentionally help the
society as a whole.
The lessons of the
prisoner’s dilemma is that
when individual’s pursue
their own interests society
can be worse off.
Does the Prisoner’s Dilemma
model demonstrate a flaw in
Smith’s philosophy?
Let’s put it to the test.
The Grade
Game!!!
What do you need to know:
1. What do you want? What is important to you? A rational choice
depends on what is important to you.
2. What does the other person/group want?
3. What strategy is strictly dominated? In other words, is there a
strategy that always yields a worse result no matter what the other
person/group does?
4. If everybody followed a rational choice are we always better off?
Group 2
Alpha
Beta
Alpha
B- (80) , B- (80)
A+ (100) , C (75)
Beta
C (75), A+ (100)
B+ (88), B+ (88)
Group 1
Player 2
Alpha
Beta
Alpha
B-
A
Beta
C
B+
Player 1
If player 2 picks Alpha- what should player 1 pick? Why?
If player 2 picks Beta what should player 1 pick? Why?
Alpha is the dominate strategy because no matter what Player 2 picks, picking Alpha gives
player 1 a higher payoff.
Player 2
Alpha
Beta
Alpha
B-
C
Beta
A
B+
Player 1
If player 1 picks Alpha- what should player 2 pick? Why?
If player 1 picks Beta what should player 2 pick? Why?
Player 2
Alpha
Beta
Alpha
B- , B-
A, C
Beta
C, A
B+, B+
Player 1
Make a Prediction:
Experiment and Data Collection:
Interpretation of results (see questions)
Make a Prediction:
Experiment and Data Collection:
Interpretation of results (see questions)
Make a Prediction:
Experiment and Data Collection:
Interpretation of results (see questions)
Round
1a
1b
2a
2b
3a
3b
4a
4b
1
Al
Al
Al
Al
Al
Be
Be
2
Al
Be
Be
Be
Al
Al
Al
3
Be
Be
Be
Be
Al
Al
Al
Al
Al
Be
Al
Al
Al
Al
4
Be
Al
5
6
Period 1
Total
Reputation or grades?
Should I have enforced the decisions?
Al
Be
Al
Al
Round
1
1a
1b
Al
2a
2b
3a
3b
4a
4b
Be
Be
Al
Be
Al
Al
Al
2
Be
Be
Be
Be
Be
Be
Be
Be
3
Be
Be
Al
Be
Al
Al
Be
Be
4
Al
Be
Al
Al
Al
Al
Al
Al
5
6
Period 2
otal
eputation or grades?
hould I have enforced the
ecisions?
Al
Be
Round
1
1a
1b
Al
2a
Be
2b
Be
3a
Be
Al
3b
Be
4a
Al
4b
Al
2
Be
Be
Be
Be
Al
Al
Al
3
Be
Be
Be
Be
Al
Al
Be
Al
4
Al
Al
Be
Al
Al
Al
Al
Al
5
6
Total
Reputation or grades?
Should I have enforced the decisions?
Al
Be
Be
Round
1a
1b
2a
2b
3a
3b
4a
1
2
3
4
5
6
Total
Reputation or grades?
Should I have enforced the decisions?
Al
Be
4b
Using the Data from the class and previous class.
1.
What does the information from round 1 (double blind) tell us about own interest as it relates to the game? In other
words, is the model correct?
2.
Using only the results from round 4 (the last game) and comparing them to the results of round 1, what can we
conclude about reputation and the impartial spectator? Did we see more cooperation?
3.
Looking at round 2 and round 3, did we see more cooperation when there was the likelihood of a repeating game?
What does this tell us about repeating games?
4.
If you came late to class, and the teacher gave you the opportunity to pick you partner, who would you pick? What
does this tell you about the impact of choice and cooperation?
5.
If the directions were different and it was explained to you that all rounds after round 4 would be dependent upon
choice and if nobody picked your group to partner with you would earn a zero for the round. How would this impact
your decisions to cooperate in the previous rounds.
Conclusion:
6. Does selfishness = self destruction?
7.
Did your prediction come true?
8.
What other conclusions can you draw from the class data and previous data?
9.
Is Adam Smith right? If so what are the strongest enforcement mechanisms?
Free market principles are
based primarily on the
idea that an individual
pursing their own interest
helps the society as a
whole.
Beta’s picked (cooperation)
1st round 2/22 (9% cooperation)
2nd Round- 14/22 (64% cooperation)
3rd round 12/22 (55% cooperation)
4th round – 6/22 (27% cooperation)
In round 2 – when a group picked AL, the other
group picked AL in round 3- 5/6 times (83%)
In round 2- when a group picked BE, the other
group picked AL in round 3 – 5/16 times (31%)
Beta’s picked (cooperation)
1st round 9/24 (37.5% cooperation)
2nd Round- 16/24 (67% cooperation)
3rd round 14/24 (58% cooperation)
4th round – 4/24 (17% cooperation)
In round 2 – when a group picked AL,
the other group picked AL in round 37/9 times (78%)
In round 2- when a group picked BE,
the other group picked AL in round 3
3/15 times (20%)
Beta’s picked (cooperation)
Beta’s picked (cooperation)
1st round 2/22 (9% cooperation)
1st round 9/24 (37.5% cooperation)
2nd Round- 14/22 (64% cooperation)
2nd Round- 16/24 (67% cooperation)
3rd round 12/22 (55% cooperation)
3rd round 14/24 (58% cooperation)
4th round – 6/22 (27% cooperation)
4th round – 4/24 (17% cooperation)
Beta
Make conclusions about points
A
B
C
D
48
42
36
B
30
C
24
18
12
A
D
6
0
1
2
3
4
Rounds
Beta
Relationships
Competition, Free choice, Trust,
empathy, reputation,
Repeating games- short term decisions
must also take into account future costs
and benefits
48
42
36
Pre-mature break up of the
Relationships
30
Instances can be limited with free
choice
24
Short term gains start to out weigh
long term costs and benefits
18
12
6
0
1
2
3
4
Ending of the relationship
Last game
No more future cost or
benefits to consider
Rounds
Can we place a numeric value on trust and reputation?
1a
alpha
1b
10.0
Beta 7.5
Repeating Game
1a
1b
alpha 10.0
beta 7.5
alpha 8.0
alpha 8.0
alpha 8.0
alpha 8.0
alpha 8.0
alpha 8.0
-------------------------------------------------------------34.0/4= 85% B
31.5/4= 79% C+
Repeating Game
2a
2b
beta 8.8
beta 8.8
beta 8.8
beta 8.8
beta 8.8
beta 8.8
beta 8.8
beta 8.8
-------------------------------------88% B+
88% B+
How do companies that don’t act trustworthy or proper get punished by people in and outside
the government?
1.6
When there is a “repeating game” an individual
can only promote their own interest, if they are
in tune with the interest and reactions of others.
Selfishness = self destruction
Conclusive or Inconclusive?
1.13
In systems where individuals have freedom of
choice, accurate information, and the ability to
respond to feedback, no free exchanges will take
place unless both parties benefit.
Conclusive or Inconclusive?
Apply the data and information from the Q and A to answer complete the following task:
When in a real-life unpredictable situation
what is the best enforcement mechanism
to ensure cooperation?
From the list rank the top 4.
Most effective
1.
2.
3.
4.
Least effective
What would think about the prisoner’s dilemma model?
He may actually agree with it so long as you take into account
free choice, information, and repeating games.
Consider. . .
Trade/Exchange
Seller
Accepting only Highest Price
Lowest
PricePrice
Paying
only Lowest
Buyer
Buyer
No trade
Forced trade
Can’t happen in free
markets
Forced trade
Can’t happen in free
markets
Mutual Benefits
Additionally, externalities are consider by
many economists as one of the more
common forms of market failure.
1a
1b
1a
1b
2a
2b
2a
2b
3a
3b
3a
3b
4a
4b
4a
4b
1a
1b
1a
1b
2a
2b
2a
2b
3a
3b
3a
3b
4a
4b
4a
4b
Round
1a
1b
2a
2b
3a
3b
1
Al
Al
Al
2
Be
Be
Be
Be
Be
Be
3
Be
Be
Al
Al
Be
Al
4
Be
Al
Al
Al
Al
Al
Al
4a
Al
Al
5
6
Total
Reputation or grades?
Should I have enforced the decisions?
Al
Be
4b
Round
1a
1b
2a
4a
Al
Be
Al
Be
Be
Be
Al
Al
Be
Be
Be
Al
Be
Be
2
Be
Be
3
Be
Be
Al
Al
Be
Al
Al
5
6
Total
Reputation or grades?
Should I have enforced the decisions?
4b
Al
Al
Al
3b
Be
Al
Al
3a
Al
1
4
Al
2b
Al
Be
Al
Round
1a
1b
2a
2b
3a
3b
4a
Al
Al
Al
Al
Al
Al
Al
Be
Be
1
Al
2
Be
Be
Al
3
Be
Be
Al
Al
Be
Al
Be
Be
4
Be
Al
Al
Al
Al
Al
Be
Be
Be
Al
4b
5
6
Total
Reputation or grades?
Should I have enforced the decisions?
Al
Be
Al
Beta
8
7
6
5
4
3
2
1
0
1
2
3
4
Rounds
Beta
24
21
18
15
12
9
6
3
0
1
2
3
4
Rounds
Beta
48
42
36
30
24
18
12
6
0
1
2
3
4
Rounds