Social Animals at Work
Spring 2020
Lectures 1-8
Topic 1: A Short Primer to Decision Theory
Topic 2: A Short Primer to Game Theory
Topic 3: Games of Cooperation and Coordination I
Topic 4: Games of Cooperation and Coordination II
Topic 5: Games of Conflict and Competition
Topic 6: Cheating, Dishonesty and Norm-Violations
,Lecture 1
The social nature of humans: see something abstract (geometric shapes moving) and add social
meaning to it.
Game theory and decision making theory were developed in mathematical field.
Decision theory
Observation: Person X chooses A over B
Assumption: Person X prefers A over B
→ We see a behaviour and infer something psychological (actions or decisions reveal
preferences)
Rationality in decision making:
NOT:
– being reasonable instead of emotional
– having a central nervous system or a bigger brain
– being educated or ‘intelligent’
It is based on some axioms (logic and consistency)
→ if you satisfy the axioms = rational decision maker
● Weak Axiom of Revealed Preferences (WARP): A>B or B>A or A=B
→ either you have preferences or they are equally valuable (indifferent)
→ Violation: A>B and A<B (difference bethween today and tomorrow, preference
changes)
● Strong Axiom of Revealed Preferences/ Transitivity (SARP):
apple > orange, orange > grapes → apple > grapes
→ Transitive decision making (can predict decision given that a person is rational)
→ Preference ranking among fruits
→ Violation: Money pump concept (violating general axiom of revealed preferences,
GARP)
- preferring grapes over apples
- Trading the fruits to get the most prefered one:
→ will trade an orange for an apple for 1 cent
→ will trade the apple for grapes for 1 cent
→ will trade the grape for orange for 1 cent
→ Will be back with with an orange and -3 cents (intransitive preference → to
some degree exploitable)
● Research into why people make maladaptive decisions (drug addiction, gambling, etc.)?
In theory irrational decision makers should be taken out of the “market”
, Rationality (in rational choice theory): choice patterns that satisfy WARP and GARP)
– Preferences can be ordered from low to high
– Decisions can be characterized as if the decision maker would maximize ‘utility’
Utility
J. Bentham: we are all equal, want to avoid pain and seek pleasure = utility (want to maximize
the utility)
- Principle of utility → how to measure it (hedonic calculus)
- A universal currency for decision theory and policy making
B. Pascal: Calculate the expected value of the outcome and take the best one (gambling)
N. Bernoulli: The St. Petersburg Paradox
- A fair coin is tossed …
- If heads appears you win 2€ and the game continues.
- If heads appears again, you win 4€ and the game continues.
- If heads appears again, you win 8€ and the game continues.
- And so on.
- The first time tails appears, the game ends.
→ how much willing to pay to take part in this gamble?
→ calculating the expected values → infinity (no one is going to gamble everything for a
game like this)
→ The determination of the value of an item must not be based on the price, but rather on the
utility it yields.
● Diminishing marginal returns
- For every Euro you get, you will become happier but less so
- Difference between 1€ for a beggar and a millionaire
Expected utility theory
The expected utility = probability of obtaining the product multiplied by the utility of the object
Implication of a Concave Utility Function:
A: p = 50% – winning 100 € and p = 50% – winning 0 € OR B: 50€ for certain
→ same expected values
→ because it’s concave, decreasing marginal returns → expected utility lower for A, so B better
Preference for risks:
- Risk-aversion: concave utility function
- Risk-neutrality: linear relationship between the value and the utility
- Risk-seeking: convex utility function
Utility Functions and the Psychophysics of Perception:
Spring 2020
Lectures 1-8
Topic 1: A Short Primer to Decision Theory
Topic 2: A Short Primer to Game Theory
Topic 3: Games of Cooperation and Coordination I
Topic 4: Games of Cooperation and Coordination II
Topic 5: Games of Conflict and Competition
Topic 6: Cheating, Dishonesty and Norm-Violations
,Lecture 1
The social nature of humans: see something abstract (geometric shapes moving) and add social
meaning to it.
Game theory and decision making theory were developed in mathematical field.
Decision theory
Observation: Person X chooses A over B
Assumption: Person X prefers A over B
→ We see a behaviour and infer something psychological (actions or decisions reveal
preferences)
Rationality in decision making:
NOT:
– being reasonable instead of emotional
– having a central nervous system or a bigger brain
– being educated or ‘intelligent’
It is based on some axioms (logic and consistency)
→ if you satisfy the axioms = rational decision maker
● Weak Axiom of Revealed Preferences (WARP): A>B or B>A or A=B
→ either you have preferences or they are equally valuable (indifferent)
→ Violation: A>B and A<B (difference bethween today and tomorrow, preference
changes)
● Strong Axiom of Revealed Preferences/ Transitivity (SARP):
apple > orange, orange > grapes → apple > grapes
→ Transitive decision making (can predict decision given that a person is rational)
→ Preference ranking among fruits
→ Violation: Money pump concept (violating general axiom of revealed preferences,
GARP)
- preferring grapes over apples
- Trading the fruits to get the most prefered one:
→ will trade an orange for an apple for 1 cent
→ will trade the apple for grapes for 1 cent
→ will trade the grape for orange for 1 cent
→ Will be back with with an orange and -3 cents (intransitive preference → to
some degree exploitable)
● Research into why people make maladaptive decisions (drug addiction, gambling, etc.)?
In theory irrational decision makers should be taken out of the “market”
, Rationality (in rational choice theory): choice patterns that satisfy WARP and GARP)
– Preferences can be ordered from low to high
– Decisions can be characterized as if the decision maker would maximize ‘utility’
Utility
J. Bentham: we are all equal, want to avoid pain and seek pleasure = utility (want to maximize
the utility)
- Principle of utility → how to measure it (hedonic calculus)
- A universal currency for decision theory and policy making
B. Pascal: Calculate the expected value of the outcome and take the best one (gambling)
N. Bernoulli: The St. Petersburg Paradox
- A fair coin is tossed …
- If heads appears you win 2€ and the game continues.
- If heads appears again, you win 4€ and the game continues.
- If heads appears again, you win 8€ and the game continues.
- And so on.
- The first time tails appears, the game ends.
→ how much willing to pay to take part in this gamble?
→ calculating the expected values → infinity (no one is going to gamble everything for a
game like this)
→ The determination of the value of an item must not be based on the price, but rather on the
utility it yields.
● Diminishing marginal returns
- For every Euro you get, you will become happier but less so
- Difference between 1€ for a beggar and a millionaire
Expected utility theory
The expected utility = probability of obtaining the product multiplied by the utility of the object
Implication of a Concave Utility Function:
A: p = 50% – winning 100 € and p = 50% – winning 0 € OR B: 50€ for certain
→ same expected values
→ because it’s concave, decreasing marginal returns → expected utility lower for A, so B better
Preference for risks:
- Risk-aversion: concave utility function
- Risk-neutrality: linear relationship between the value and the utility
- Risk-seeking: convex utility function
Utility Functions and the Psychophysics of Perception:
