Coase Colored Glasses


Archive for February 14th, 2011


Friedman, “… however tightly we may close our eyes to strategic behaviors, we find ourselves stumbling over it every few steps.” Strategic behavior is defined by Mr. Friedman as an individual, in a given circumstance, will use the situation at hand to accomplish his or her own objectives, whatever they may be.

He goes on to explain that the heart of the problem with individual action is to have the information about each individual actors goals and their knowledge of the situation at hand. The less information you have the harder it is to understand how one will act.

The purpose of this theory is to give us an analytic backbone in which to form laws around to limit individual behaviors in some cases, or more accurately, to convince people to engage in activities that enhance the publics standard of living.

Friedman used for his first example, the 2 adolescent males that are driving their automobiles to the same intersection at which they are at 90 degree angles. Each of the 2 drivers has 2 choices. First, each may slow down to completely avoid an accident altogether. They may be risking precious time, especially if they have many more of these ungoverned intersections to come across with drivers converging on either side of the intersections at the same time. They may also continue at the same rate of speed and play “chicken” or spice things up by speeding up. One driver may stop, he may not. What information does the other driver have that I don’t? Is he suicidal, and wants to take me down with him in a blaze of automobile firey glory? Has he been drinking? Is he to worried about his radio to care about me?

How do I as a lawmaker alter either drivers actions at such an intersection? There are 3 ways that I’ve identified. First, posting rights through signs and establishing round-abouts. These deter through notifying each driver that if there is an accident he will be at fault. Second, accountability. If there is a cop there handing out tickets for a failure to yield we will be more likely to stop. Third, information campaigns. Show what will happen to each individual in the likelihood of an accident and give them the information on how bad an accident can be. The more a driver knows about how much an accident will cost him, the less likely he will want to be in an accident.

Game theory

Game theory as explained by Friedman has always been something that has intrigued me from the first time that I studied it.  My favorite application is that of the Prisoner’s dilemma.  I have always wondered why people act irrationally and this give a pretty good explanation.

The application that becomes very relevant for all of us involves tariffs between two different countries.  Each country has an incentive to impose an import tariff on the other.   However, if they both impose tariffs they are both worse off.  The optimal strategy is for neither to impose tariffs but this is rarely achieved.  You run into circumstances where one country retaliates against another which lowers the efficiency even more than the first original tariff.  This same process can be applied to quotas and other forms of regulations such as environmental ones.

Game theory applies as far as pollution and environmental regulations are concerned as well.  The optimal strategy is for all players in the system to regulate pollution.  However, they both have an incentive to defect and free ride which results in inefficiencies.

In these cases the government should take the role to give incentives by either direct payments or Pigovian taxes to try and correct the incentives that are currently in place.  Unfortunately, because of asymmetric information these interventions can also produce inefficiencies.

A Tribute to Jeannie Johnson.

Reading the section on bilateral monopoly, I felt like I was back in Jeannie Johnson’s Intro to International Relations class.  Thank goodness for this economic logic and reasoning or we would have blown up the whole world by now.  It was in Russia’s interest not to nuke us because they knew we would nuke them back.  As Friedman says, “the real-world Doomsday Machines worked, with the result that neither was ever used” (88).  So far, they’re still working, even though the number of countries with nukes keeps rising.

But we have moved from a Cold War with Russia to a global “War on Terror.”  It’s much more difficult to deter terrorists with the threat of nukes because it’s unlikely that we’ll retaliate by dropping a nuke–it’s not a credible threat.  Instead, we retaliated by sending our military into Afghanistan.  Unfortunately, like Jeannie Johnson taught us, Al Qaeda attacked us on September 11 with the assumption that we would retaliate–hoping and planning that we would, even.  It’s like a kid who picks on a bully because he wants him to beat up on him, but not kill him, and hopes the bully will get in trouble or hurt in some way.  It’s difficult to incorporate such motives into this economic framework for foreign relations.

Friedman illustrates the example of a bully with the “policy of beating up anyone who does things he doesn’t like,” and suggests that “as long as everyone knows he is committed to the strategy, other people don’t cross him, and he doesn’t have to beat them up” (89).  Teddy Roosevelt would call it speaking softly and carrying a big stick.

So economics influences foreign relations besides just international trade and tariff wars; economics runs the military and nuclear arsenals, at least in the realist’s world.  The realist’s paradigm is the economic view that a nation, or its people and rulers, are rationally self-interested and will pursue policies that are in their best interest.  The thing that complicates it is that other nations are also rationally self-interested and similarly pursue such policies.  So this is ‘the hard context’ that Friedman refers to where we must remember that “other people out there are seeking their objectives, and that they know that I am seeking my objectives and take account of it in their actions and they know that I know…and I know that they know that I know… and…” (84).  So put your hands together for Hillary Rodham Clinton.

Lets Play a Game

I had a lot of fun imagining the story/analogy Friedman paints for me about the one good and the one buyer.  How much fun would it be to actually live in a world for a small amount of time.  It is something that I got to do quite often when I spent some time in South Africa.  I would go to these little markets and buy some small trinkets from these street vendors.  Everything there had a price on it but as always that price was negotiable.  The two of us would be a living example of Friedman’s analogy for just a brief moment.  The only good available was the necklace and I was the only one interested in it.  I was willing to pay probably quite a bit more than it was worth but no one likes to get ripped off.  We would haggle a bit and the price would come down tremendously.  After it was done one of us would walk away feeling cheated.  If you were to ask me back then what I was doing I would have causally answered, “just playing a game.”  That is what it felt like.  One winner and one loser.  sounds like a game to me.

I really had no idea that I was actually carrying out the economic principle of game theory.  I would way my options, and so would the Indian man.  It got me thinking that maybe I do this game theory thing all the time on a daily basis.  Actually I am fairly certain that I do.

Game of Chicken

Out of the various chapters that we had to read I did think that this was the most interesting.  I started out with reading David Friedman’s chapter on game theory.  Two reasons to pursue ones own pleasure they must either treat the world as things or items and not people.  The other reason requires a lot more work to accomplish ones pleasure, and that involves a full account of other peoples desire to accomplish their own desires.  At this point when I was reading the book I was thinking of the irony that I was thinking about my own game theory that I am stuck in at this current point.  I have been working on a couple of different larger projects that require a lot of political loops to go through in order to get my own purposes accomplished.  Currently, I have been facing a lot of resistance and have been rather frustrated that I can’t accomplish what I want to.  This past weekend I have been thinking about ways I can get through the loops necessary to accomplish my purposes, and realized that I am facing other people who have selfish agendas as well.  I am now back at the start thinking and analyzing ways of accomplishing my purposes, but I do have to have keep in mind that I will need to help the athletics department out in order to get where I want to be.  In the end I believe that game theory is essential in the economic and political world because it helps lift both parties to a greater level of competition and accomplishment.  In my experience I have seen the benefits of competition in lifting my ideas, and the ideas of those I am competing with to a higher plane and more business gets accomplished.

Sweet, sweet revenge.

I agreed with 99% of what Friedman was saying in his book about bilateral monopolies and game theory.  Especially about the ‘prisoner’s dilemma’.  Having experienced this first hand in class with quarters, I would like to add something that either Mr. Friedman forgot about or did not think important enough to include in his book.  Revenge.  Doesn’t it feel good to see people that are happy all the time (when you’re not) frown or be sad?  I love it.  Makes me feel good inside.  I believe revenge is closely linked to law and economics, because revenge is just and you attain something of an equilibrium.

I just finished watching “The Shawshank Redemption” and it’s the best part when Andy escapes, takes the money that the Warden owes him, and the Warden kills himself.  Andy is only taking his share of what the Warden honestly owes him.  That’s like an equilibrium; nothing more, nothing less.

I suppose if the same people were to play the prisoner’s game over and over, they would either become more and more selfish or more trusting and cooperative.  If I were to play it again and knew fully well that my action would make us both lose a quarter, I would do it.  Because it would bring me so much satisfaction to see my partner lose a quarter, just like I did.  Tremendous joy even.  Granted there are always exceptions to everything in life (especially in economics with all the assumptions that are made), but I just felt that the topic of revenge ought to have made a cameo in Friedman’s book.

In Friedman’s book, one of his examples of game theory was when the drivers needed to decide to either speed up or slow down. If they both sped up, there would be an issue. If they both slowed down, once again there would be an issue. One of them had to either speed up or slow down, but not both. I think one of my favorite “real life” examples is when a driver pulls out of a driveway – seeing a car coming at 40 miles per hour – and they decide there is enough room/time for them to pull out. In most cases, the on coming car slams on their breaks (It has happened plenty of time in only my few years of driving) because the merging car does not speed up quick enough. Most of the time the merging car does not have much of an urge to pick up speed to avoid the situation.  What if the on coming traffic reacted too late to their stupidity? They just assume the on coming car will brake. It has even happened on days after a snow – an exceptional expectation of the driver pulling in to traffic. There is bound to be some ice on the road. Is it not the job of all the drivers to flow with the traffic? That is what I thought. Going through drivers’ ed., I was told that you could get a ticket for speeding and for going too slow. They are both ways of disrupting the flow of traffic (speeding, not so much, because most do not do it to the degree that there is an accident that causes the traffic disruption) and causing the probability of an accident to go up.

Playing Games

I understand all Friedman says about game theory… until I get to where he talks about plea bargaining. Yes, it is in the DA’s best interest to offer the defendant a plea bargain. If the defendant is guilty, the bargain will most likely be in his best interest and he will take the deal. But what about when the defendant is completely innocent?

If the defendant were truly innocent, then, rationally, the plea bargain would make him worse off, and he should pass on the deal. However, overzealous DA’s often use threats of the highest punishment possible for the crime the defendant is charged with as a bargaining tool to get the defendant to take the deal. Instead of taking the time to fully investigate the crime and lay the facts before a judge and jury, the DA hopes to get the case handled as quickly and as cheaply as possible. Occasionally juries do convict innocent people. When that fact is paired with the threats from the DA, even a completely innocent individual may in fact take the plea bargain. The game completely changes when dealing with an innocent person. While game theory assumes that an individual would rationally take the best option possible, this idea completely breaks down when it comes to plea bargaining. Even if the defendant is guilty, a judge may issue a lighter sentence than the DA advises, and possibly even a lighter sentence than what the plea bargain would have given. There are so many other factors that can play into a decision while dealing with game theory, it’s hard to say sometimes what is really the best option.

Bilateral Monopoly and Outside Influences

I just wanted to share my experience today in the loosing side of the Bilateral Monopoly. I worked at a tractor dealership and often times am placed in the same situation as Mary, with a tractor to sell and price I hope to get out it. Generally, I have what the buyer needs and we can negotiate a price in which we both win. But today, a deal was influenced by an outside player who’s actions I couldn’t predict. The price I was negotiating was compromised by the outside player, and I eventually found myself in a situation where I lost. This was a very frustrating situation and I have learned the hard way that I cannot anticipate another persons actions or how they will affect me.

That being said, I found this chapter very interesting. The situation in which he described the bullies who ended up killing each other in a crime of passion. But I had to disagree with him in the fact that increasing the punishment would deter the amount of people participating in hawk/dove situations. The exact reasoning behind a crime of passion implies that it is irrational. No rational prevention towards can truly deter a crime of passion in my opinion.

I also found the chicken game between the U.S. and Russia very interesting. In a situation where it appeared that no one would win, both sides ending up winning because no nuclear warheads were used. I guess it just goes to show that we can rarely predict the outcomes of people even in the most rational or irrational environments.

Every game is different but the ideas are sound

Friendman’s description of games theory stipulates that is simultaneous games, especially in the prisoners dilemma where others actions are unknown, all an individual can do is choose his best course of action based on his options and what he predicts his opponents (other person) best or most rational option is. The more I read of economics the more I see in around me in everyday life. Basically, in both the prisoners dilemma and in the monopoly or bully example, information is king.

Information is the most important thing you can have on your side. If you are able to predict someone elses preferences, and thus their next move, you have essentially filled in your side of the “game” which allows you to pick the outcome that will benifit you. Likewise, in parties are able to exchange information both may become better off. Examples of this are neither speaking in the prisoners dilemma or if all people who got tickets in fought them in court, thus forcing a change (previous post I enjoyed). In sports, stocks, work, and even relationships on valentines day (perhaps this is why I don’t have one), knowing information is key.

So must importance is placed on education (especially higher) on learning how to think critically. It seems game theory explains this perfectly. The more we can understands others actions, whether they are our opponents, customers, business partners, or valentines, the better our chances of success are, whatever success that we value.

A lot of other posts seem to be unhappy with Friedman not stipulating that every game is different and tiny changes in circumstance can change the outcome. On the contrary, I feel that this chapter greatly diverged from the vast amounts of theoretical and mathematical economics most rely on. He says that, ” In most real world applications of game theory the answer is ambiguous”. Friedman is supplying the mold to which diverse, independent thinking individuals apply their own information and value systems to ultimately produce an outcome; like a snowflake, I would venture to say no two say circumstances are the same, even if the outcomes may seem similar.