Week 1: Introduction – Social Interactions – The
Invisible hand – Game Theory – Experimenting with
Double Auctions (4.1, 4.2)
Social interaction: interaction: action between people + social: two or more individuals
Two or more individuals connected through their actions
People act, and re-act in relation to others
People form expectations, evaluate consequences and make decisions
Social interactions are the building block of a society, they affect us in everyday life
The actions we and others make have consequences on us and on others: conflict of
interest, or opportunity for mutual gain (depends on the situation and our preferences and
expectations)
Interpersonal connections are very important for our happiness and well-being, also
important for businesses
Self-interest: can sometimes lead to results that are considered good for all participants, or
outcomes that are good for some, or outcomes that none of those concerned would prefer
Utilizing self-interest for the general good: governments limiting the actions that people are
free to take / peer imposing punishments on actions that lead to bad outcomes
Onderzoek: What is the effect of business networks on firm performance?
Randomize Control Trial (RCT), 2820 firms in China
Treatment: small groups with monthly meetings, control: no meetings
Results: increased revenues and profits, effects persisted, better peers higher growth,
managers shared business-relevant information, improved supplier-client matching
Economic effects of Facebook: social media has potential societal benefits but also harms
Experiment of 4 weeks without Facebook leads to: reduced online activity, increased offline
activities, less news knowledge and political polarization, increased subjective well-being, a
large persistent reduction in Facebook use after the experiment
Persistent effects of brief social interactions can have a large impact on economic outcomes
Onderzoek: data of matched immigrant-ships from beginning of the 20 th century
Travelling with higher quality shipmates increase quality of job at destination
Effects stronger for those travelling alone and with fewer connections at destination
Immigrants are affected more strongly by shipmates who share their languages
Channel: shipmates provide access and/or information about employment opportunities
Social dilemma: a situation in which actions taken independently by individuals in pursuit of their
own private objectives result in an outcome which is inferior to some other feasible outcome that
could have occurred if people had acted together, rather than as individuals
Occurs when people don’t take adequate account of the effects of their decisions on others
Climate change: early action on climate change would benefit us, but this will not happen if
governments and businesses stay to pursue their own objectives without taking into
account the effect of their actions on others (including future generations)
Traffic jams: driving alone to work rather than car-pooling
, Garret Hardin: common pool resources easily overexploited unless we control access in some way
Fishermen: as a group would be better off not catching as much, but each individual prefers
to catch as much as possible (+ the sacrifice as individual will only marginally affect the total
fish cached)
Pollution: humanity would be better of by emitting less, but as individuals we may prefer not
to emit less pollutants (+ individual sacrifice hardly makes a difference)
Free ride: benefiting from the contributions of others to some cooperative project without
contributing oneself (one person in the house cleans, the rest free rides)
Altruism: the willingness to bear a cost to benefit somebody else
Strategic interaction: a social interaction in which the participants are aware of the ways that their
actions affect others (and the ways that the actions of others affect them) each actor designs a
plan of actions taking into account the possible actions of the other
Game: a way to model a strategic interaction
Players: the people involved in the interaction
Feasible strategies: the actions each player can take
Information: what each player knows when choosing actions
Payoffs: consequences/outcomes for every possible combination of actions
Example: The ‘invisible hand’ game
Players: farmers Anil and Bala, grow rice or cassava?
Actions: they have to independently decide who will produce which crop
Anil’s land is better suited for cassava, Bala’s land is better suited for rice
They both sell whatever crop they produce in a nearby village market
Quantity produced affects price the less produced, the higher the price
Game format
One-shot: interact just once
Simultaneous moves: both decide independently + they don’t
know what the other person has decided to do when they
decide
Dominant strategy: best response (highest payoff), whatever the
other player does (Anil: cassava, Bala: rice)
Decision does not depend on what the others do, but the
payoff does
Dominant strategy equilibrium: an outcome in which every players
pays his dominant strategy
‘equilibrium’: neither of them would want to change their
decision after seeing what the other player chose
Anil and Bala specialized in producing the good they’re best at + no excess supply simply pursuing
their self-interest resulted in the best possible outcome for each player + the largest total payoff for
the two farmers combined
Although they independently pursued their self-interest, they were guided to an outcome
that was in their joint best interest by an ‘invisible hand’
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