One of my favourite activities is to sit down next to a window, at a coffee shop, on a busy street, and watch people go about their daily lives. Sometimes you will capture interesting scenes such as a couple arguing or an older woman being ecstatic while on the phone, or perhaps two strangers giving each other flirting stares. I like to imagine what is going on in their minds or their lives at that moment. Maybe the couple is arguing about how one of them forgot the other’s birthday: trust me, it’s bad news if you do! Perhaps, the person receiving the phone call just got the news that she will be a grandmother for the first time. Maybe the strangers are not strangers after all. Perhaps, they just finished going on their second date and agreed to make their relationship official.
I have always been interested in human behaviours, and I have always wanted to understand them – from a distance. I am not too keen on being in large crowds or being surrounded by a lot of people. I like being in my little bubble and ignored for the most part. In fact, in recent times, I have been much more curious about the choices we make. Why do some people buy Apple products rather than Samsung products? Why do we have a particular “type” of people we prefer to date? How do we decide which job to apply to? Because I like to observe people from a distance, like a fly on a wall, I have a penchant for theoretical things rather than applied things: I like to think, imagine, and ponder.
Now, if I said: I want to go to College and study human behaviours and the choices we make. What would you suggest? Psychology? Sociology? Commerce/business? Neuroscience? Mathematics? What about Economics? Would you have suggested Economics? Most would not. For some reason, when I tell people that I study Economics, they ask me about the current hot stocks to buy, what do I think about the housing market, or what policies the government should adopt to boost our economy. I typically answer: “Sorry – I have no idea, and I don’t really care all that much, to be honest.” I am a theoretical Game Theorist and Market Designer. And, this is the way I see the world around me.
Each person in a given situation of interest is called a player or agent. Each player has choices they can make. They are sometimes referred to as actions, strategies, or alternatives. Each choice results in a level of satisfaction which is called a payoff. For example, choosing an apple product over a Samsung product must imply that somehow, you preferred the apple product at that moment. Then, we could say that buying the apple product was more satisfying and thus provided you with a higher payoff. There are different approaches to state that you prefer, say, Mac computers over Alienware computers. One of them is revealed preferences: since I saw you buy a Mac computer, whereas the only other option was Alienware computers, then you revealed to me, from your choice, that you preferred Mac computers. Another is the classical axioms of consumer preference, which would require us to dive deep into set theory. These axioms ensure that every player makes rational choices and that these choices are “well-defined.” Amongst these axioms, there is transitivity. A transitive preference is: if I prefer A to B and I prefer B to C, then it must be that I prefer A to C.
I have come across many who have told me: “economics is faulty because humans are not rational beings, but you assume that they are.” I typically respond by paraphrasing one of my undergraduate professors from Bishop’s University:
“In economics, we say that every person is rational because they make the best feasible choice in the given situation they find themselves in.”
Recall a time where someone accused you of being irrational. That individual was most likely comparing your current state to your “normal” state. That is, the difference in your behaviour is what made them believe that you were being irrational. However, in economics, we look at every infinitesimal timestamp, as well as their environment. These elements are used to determine what actions are feasible to you. Given these feasible actions, your choice of action is rational. Hence, agents behave ‘rationally.’ Immediately, you will notice that an economist’s definition of rationality is different from the everyday use of the word ‘rational.’ So, does this mean that classical preferences and revealed preferences explain every choice we make? At this moment in time: no. The concept of preferences is highly theoretical, and thus we must conduct experiments to show that they are correct. Mathematically, they make sense, but experimentally, sometimes things do not go according to plan. So, when experiments do not match the theory, what does one do? We reevaluate the hypothesis. In fact, we say that classical preferences and revealed preferences hold under certain assumptions.
So, we have players, strategies, preferences and payoffs, and rational agents. These are the building blocks I use. The next step is to ask myself: why would a player want to make a certain choice? That is, I seek the incentives of each player and determine what kind of strategies I am dealing with. If choice A gives you a higher payoff than choice B, then would it not be better for you to choose A? Would A not strictly dominate choice B? By doing so, it is sometimes possible to conjecture a reasonable outcome or solution. The only problem is that our choices are usually conditional on something else. In Game Theory, choices are typically conditional on other players’ choices. Then, we would specify that your choice A strictly dominates your choice B, if its payoff is higher, conditional on the other players’ choices. This theory works very well if everyone knows everyone’s set of actions.
On the other hand, it is much more realistic to consider the fact that we do not know with certainty what another person will do. Think about the game rock-paper-scissors. Do you know for sure what the other person will choose? No. However, you can have a belief of what they will do. You may tell yourself: “Oh, this person always chooses paper. So I will go with scissors.” Since there is a probability that they will not choose paper, it is only a belief, never a fact. Also, economists will consider your beliefs to be updatable. That is, your belief of the other person’s choice may change over time. In fact, if you did choose scissors, but the other person chose rock, then you just lost that round. What if they said “best of three.” Then you go again and repeat the game. But this time, you may think that because you just played scissors, they will think “surely they (you) wouldn’t go for scissors again!” and since you think they would say such a thing, then you decide to play scissors again. Suppose the other person knows you well and is sure that you will have this exact thinking process. Then they might play rock again. Now, what if you also knew them well? This back-and-forth reasoning is a defining feature in sequential games or repeated games.
Now that I have explained how I see the world around me, why is this useful? Game Theory explains a lot of our interactions in a basic way. It can explain why some couples argue differently than others. Sometimes a couple will use a tit-for-tat strategy where, if you say something hurtful to me, I will say something hurtful back to you and so on. Or it may be a tit-for-two-tats where, if you say something hurtful to me, I will ignore it. If you say something hurtful again, I will unleash hell onto you and bring up the time you forgot my birthday!
Alternatively, if you just turned 18, unexpectedly got pregnant, and you want to phone your mother to tell her, but she doesn’t know. Then perhaps you will adopt a specific strategy (sequence of actions) that will minimize the possibility of an adverse reaction from your mother. For instance, you may simultaneously announce your pregnancy and the marriage proposal from your romantic partner, who wishes to bring up the child with you. Your mother might not be as upset as if you had only announced the pregnancy. Thanks to your strategy, your mom is now compassionate and understanding, which makes everyone better off. To you, dear readers, what was a strategy that you recently used to minimize negative results?
I thank you infinitely for reading this post and if you would like to know more about the mysteries that surround us, please join my subscription list to keep up with my newest content. If you have any questions, please add them to the comment section and I’ll make sure to answer as soon as humanly possible.
Get new content delivered directly to your inbox.
No one can dismiss the amazing feeling we get after spending some time in nature. We instantly feel relaxed and reinvigorated. Some might attribute this effect to time spent far away from work, and even though they could be correct, it is not the whole picture. Biophilia is a relatively new concept that brought the…
Good evening my dearest followers, Please, take a moment to enjoy this excerpt for my newest post (Bring Up Blood). We could most certainly not live without blood. It is absolutely essential for the survival of our most distant limbs and organs. Even though almost all of our respiration is thanks to our respiratory organs,…
We keep hearing on the news of the many achievements made by Artificial Intelligence. From winning at Chess to winning at Jeopardy! against its longest streak-winner, AIs seem to truly outdo themselves. However, nobody can agree if those machines truly hold something we can call Artificial Intelligence. They can’t do more than the task they…