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Showing posts with the label game theory

Decision Making as Output and Bounded Rationality

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  The classical economics theories proceed on the assumption of rational agents. Rationality implies the economic agents undertake actions or exercise choices based on the cost-benefit analysis they undertake. The assumption further posits that there exists no information asymmetry and thus the agent is aware of all the costs and benefits associated with the choice he or she has exercised. The behavioral school contested the decision stating the decisions in practice are often irrational. Implied there is a continuous departure from rationality. Rationality in the views of the behavioral school is more an exception to the norm rather a rule. The past posts have discussed the limitations of this view by the behavioral school. Economics has often posited rationality in the context in which the choices are exercised rather than theoretical abstract view of rational action. Rational action in theory seems to be grounded in zero restraint situation yet in practice, there are numerous restra
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Robert Aumann's Agreement Theorem: A Note

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  In 1976, publishing in the Annals of Statistics, Robert J Aumann made a contribution that perhaps is not just significant but provokes certain debate. He propounded what has to come be known as the Aumann agreement theorem. It is about agreeing to disagree or rather there would be no agreeing to disagree. To Aumann, two people let’s say 1 and 2 are said to ha have common knowledge of an event E if both know it, 1 knows that 2 knows about it and 2 knows 1 knows about it and 1 knows that 2 knows 1 knows about it and so on. Implied is the knowledge about the event is public with no secrecy. Carrying on, the theorem suggests, if two people have the same priors and their posteriors for an event A are common knowledge, then there posteriors are equal. If one were to decode the meaning, it implies given the absence of information asymmetry about an event, the two people in knowledge of the events would hold the same views even though their source of information would have differed in quanti
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Mathematics, Tharoorisms and Prisoner's Dilemma

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  A few days before, came across an interesting tweet. This tweet is available here . The tweet links to an article that talks about jargons and their usage in everyday life. The author in the article points out that research indicates, the use of jargons at every second instant reflects a case of insecurity and not academic learning or competence.   Therefore, one would wonder, why people resort to jargons and high sounding words at the drop of the hat. Of course, people like Shashi Tharoor or Manish Tiwari seemed to master that. Therefore, it would be pertinent to decode the logic behind using Tharoorisms so as to speak in the everyday life. If one goes further, there is a tendency among the social scientists to increasingly resort to mathematical formalism of late. Interestingly, the mathematical formalism only makes the concept more complex than demystifying it. Unless the goal is to make the concepts or language complex, there seems to be no reason why one should use it. Yet peopl
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Pakistan and Role Model Dilemma

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As one comes to terms with the horrors of the recent massacre of school children in Peshawar, What probably went unnoticed were the names of the children who either died or escaped.   Names like Osama, Dawood Ibrahim seemed common.   In a world where names are usually associated with aesthetic or even predictive powers, these names mean something. If names are meant to convey certain signals, these do certainly reflect in a way contemporary mindset of an average Pakistani.   Stephen Levitt in his bestseller, Freakonomics goes on to discuss the economics behind names. Yet, the explanation does not answer satisfactorily, the state of affairs. Incidentally, the broader theme around which Levitt’s ideas revolves around- role of incentives; might help us in some way to understand what it means.   At the heart of the society and its inhabitants is the need to achieve, urge to succeed, climb the higher layers of the power pyramid, places oneself at the apex of the profession. Yet to
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Blockbuster Populism

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Often we see populist policies getting all round support from political parties. There are number of instances wherein pieces of legislation perceived to be good economics get defeated or withdrawn. Is it merely perception of something else at work. I've my own take on this. We need to understand this apparent paradox through Game Theory and Prisoner's Dilemma. More on this here
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Prisoners Dilemma and Retail Promotions

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It is not unusual to get 1 kg onion free for purchases above say Rs. 250/- or half kg sugar free for purchases above say Rs. 300/- in leading retail outlets. Does this attract consumer loyalty. A study sometime back along with my students revealed certain interesting dimensions. The presentation is found here . I will delve into certain dimension here. Promotions are key element in this process and higher promotional elasticity will be driven by the increased ambiance as an output coupled with reduction in psychic costs. Researchers and strategists can use utility models to study consumer behavior and the reasons for their preference towards particular stores. In the increased emphasis on promotions, an interesting fact to note that customers continue to be loyal to firms like Nilgiris and Namdharis which are very low on promotions. At least in the initial phases, customer loyalty could not be generated in major food retailers despite excessive emphasis on promotions as the f
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