Lecture notes for the elective course Social Animals at Work. The lectures go though all the main points from the suggested articles that will be examined in the exam. The notes are from 2020.
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:
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