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Many of you will know that Game Theory is an established branch of economic thought. It can be used to model a wide variety of situations, leading to predictions of the behaviour of economic agents. This blog is for people who are new to that idea.
I am an enthusiastic player of board games, but regard Monopoly and Risk as pretty awful. Many of my pupils ask to play Monopoly in the last lesson at the end of term. Like a proper Grinch I always say no, but usually use the conversation as an opportunity to raise a discussion about what (if anything) you might learn about economics from the game.
I was therefore drawn to an article in The Guardian by Paul Mason (who ranted about the banks recently) who argues that “the world is like a real-life game of global domination, where five mighty empires across the globe are gearing up for an economic wargame where there could be no winners”.read more...»
Nobel Laureate Alvin Roth (2012) gives his view on How useful economics is. For more on Roth's work in theories of market exchange in areas such as organ donation click the links below.read more...»
When students first ask what economics is all about, I always find it tricky not to give a very long answer. It’s the same when starting to plan those induction lessons in economics: what will help them to understand the base principles of the subject but also develop an awareness of the economist’s mindset? At IB, the Foundations of Economics section of the syllabus sets out what to cover quite nicely. I've shared a few useful resource links below.read more...»
Why do we get summer holiday blockbusters? They seem to matter more and more to Hollywood studios. According to one professor "the entertainment industry is moving more towards a winner-take-all-market". Yet it wasn't supposed to be like this. A best-selling 2008 book, The Long Tail, argued that the mainstream was going to be "shattered into a zillion different cultural shards," as fickle consumers "scattered to the winds" using the internet to find the books, films and songs that met their unique taste. So what might be going on?read more...»
Here are some newly published resources covering aspects of behavioural economicsread more...»
For students and teachers interested in behavioural insights this short video from the behavioural insights team in New South Wales provides a good introduction to some of the behavioural nudges employed to influence choices.
Behavioural insights draws on research into behavioural economics and psychology to influence choices in decision-making. By focusing on the social, cognitive and emotional behaviour of individuals and institutions.read more...»
Sendhil Mullainathan (Harvard) summarises his keynote lecture at the RES conference 2014
Harvard Professor Sendhil Mullainathan, one of the leading economists in the field of behavioral economics, has recently released a new book with Princeton cognitive psychologist Professor Eldar Shafir entitled Scarcity: Why Having Too Little Means So Much.read more...»
Professor David Tuckett (UCL Psychology and Language Sciences) provides a brief insight into the role emotions play in finance and the decisions taken in particular by money market operators.read more...»
Here is the presentation that I gave to students at the RGS Guildford event yesterdayread more...»
Paul Craven provides some witty insights into the effectiveness of different behavioural nudges!read more...»
Dr Dan Lockton looks at ways in which behaviour responds to cultural or contextual nudgesread more...»
Here are some suggestions for wider reading on aspects of behavioural economics. Many sixth form students like to explore behavioural economics once their main exams are done. Wouldn't it be great if behavioural insights and theories made it into the mainstream syllabus across different exam boards!read more...»
I have been greatly enjoying Gerd Gigerenzer's new book on Risk Savvy citizens - here he is discussing some of the key themes in his book at a TED talk in Zurich in the autumn of 2013read more...»
Since moving to Singapore from London last year, I’ve been intrigued by some of the similarities and differences between the two cities but one thing that has stood out is that Singapore’s citizens on the whole, are very obedient. Its low crime rate is well known but one thing that really struck me was how much they followed the rules. Is this due to the fines, a series of nudges or perhaps a bit of both?read more...»
American economist Hyman Minsky was an interesting character who pops up around the edges of many of the things I read. The BBC posted an article about him that I recommend, with the provocative title Did Hyman Minsky find the secret behind financial crashes?
I’ve just summarised what the article describes as 5 key ideas that he presented in his work.read more...»
Pub economics often explains the plight of poor countries in terms of the problems posed by corruption. That approach might have some value, and to raise the quality of your analysis of this topic, it’s helpful to say why and how it might arise, and the effects it might have. Rich countries are also vulnerable of course.
The Economist has a really helpful couple of articles on this topic, which it calls ‘crony capitalism’.read more...»
There are two useful articles here for A2 economists about the news that Morrisons has made a £176m pre-tax loss for the year to February 2, and the strong impact that their plans to compete hard with the discount retailers has had on the stock market value of Tesco and Sainsburys.
We often cite the UK supermarket industry as an example of oligopoly, and today's news around Morrisons (Britain's 4th biggest supermarket) gives plenty of scope for students to use some stakeholder analysis to look at what is going on in that market - who wins and who loses?read more...»
Watch this short six minute video to learn how London cabbies are a lot like the ideal boyfriend. Rory Sutherland on excellent form again! In six minutes he discusses sunk costs, commitment devices, human capital, information failures and price discrimination in restaurants on Valentine's Day.read more...»
Here is a really well produced and clear visual explanation of the Hotelling model of spatial location. As two competitive cousins vie for ice-cream-selling domination on one small beach, discover how game theory and the Nash Equilibrium inform these retail hot-spots. A good short video to use when teaching or learning about game theory.
For more ....Tutor2u's Introduction to Game Theoryread more...»
In this updated blog entry I am bringing together some of the resources that we have produced on the Tutor2u website covering aspects of game theory. I hope this will be useful for students and teachers who focus on ideas from game theory as part of their courses:
You can play some online game theory games hereread more...»
There has been lots of talk in the media recently about the supermarkets’ Christmas advertising campaigns.
Sainsbury’s have employed an Oscar winning director for their campaign, although he failed to spot the Co-op’s own brand range in the background, Tesco stole a march on the others by starting their advertising campaign on a Friday, which makes a lot of sense, but Asda wanted to get maximum exposure by launching their campaign during X-Factor, the most watched program on commercial television. No doubt Morrison’s will be launching their Christmas campaign sometime in late January….read more...»
We are delighted to host on our blog this article from Alex Macarthur an upper-sixth student at Altrincham Grammar School for Boys. Alex enjoys is especially interested in ‘Behavioural Economics’. In this feature he looks at pricing anchoring in markets. This article was originally published in the student magazine www.lucigmag.co.ukread more...»
You don't have to look very hard at the UK economy before finding evidence of oligopolistic market structures. I've had a good look through the T2U archive and found several articles on the topic over the years. If you've already seen Geoff's excellent presentations - Unit 3 Micro: Oligopoly - The Basics and Unit 3 Micro: Oligopoly and Game Theory you'll perhaps be ready to use your grasp of theory to analyse the UK banking market.read more...»
It occurred to me recently that the way the government tries to control the population, by encouraging and discouraging certain activities, is rather like the way in which I, as a parent, try to control my child.
Legislation – Setting rules
Imprisonment – Grounding
Fines – Reducing pocket money
Providing information – Using examples from experience, educating
Subsidising – Helping towards payment
State Provision – Buying things for my children
For example, I don’t want my daughter to smoke, drink or take drugs, so what do I do to prevent this? I will provide her with plenty of information as to why she shouldn’t partake in these activities, should she do it anyway, I’ll probably ban these products from my house and also reduce her pocket money in order to prevent her from buying them.
How does the Government try to prevent its citizens from smoking drinking and taking drugs? Well, it provides us with information, legislates against it, setting age limits and laws to try to prevent excessive consumption, and places large levies on alcohol and tobacco products to try to discourage consumption, something akin to what I am putting into place.
Will it work?
In some cases, yes, in others, no and the combination of controls will probably vary for each individual, but as a parent I only really get one chance to get it right for each child, the Government, however, can play the percentage game.
Bringing up children is not all about steering your child away from negativity, much as the Government also wants us to do positive things with our lives. For example:
I see education as quite important in a child’s life and as such, I will try my best to ensure that my daughter takes advantage of the best education available to her and embraces it. How will I do that? I will insist that she goes to school, as will the Government. I will monitor her progress carefully, as will her schools. I will encourage her to work hard, as will her teachers, and I will provide information as to the positive future that will ensue from her hard work, as will Government initiatives.
So, all in all, I am my daughter’s Government, trying to persuade her to make the correct decisions, in her own best interests. I’m sure that along the way, I’ll make some horrendous mistakes, as I’m sure most students would agree, parents don’t always know the best way to deal with situations, much as Governments don’t, largely down to information failure! I’m sure Sophie will make some choices that I won’t necessarily agree with, but as long as I look at the long term and have a clear direction, hopefully I’ll raise a happy, positive individual, much as the Government wants to do with all of us.read more...»
Why do CEO’s earn so much more than the regular workers? Why do managers of the largest teams earn disproportionately more than their corresponding managerial advantage affords them? The answer lies in the fact that these are both examples of winner-take-all markets.
Collaboration and innovation are often fast-tracked by creating the right spaces for people and ideas to mingle.
This seven minute video from the Economist is deeply interesting - it looks at the Artisan's Asylum near Boston, Massachusetts in the USA which is host to a number of new hardware businesses. They are built around cheap work space, high-tech tools and crowd-sourced funding. The project has spawned some notable success stories many built around digital 3D printing - is there anything like an equivalent Maker Movement in the UK?read more...»
MOOCs, massive open online courses, may change the university and college system for ever. How potentially disruptive are MOOC providers such as EdX, Coursera and others in the complex market for higher education?
MOOCs - threat or opportunity? (BBC Newsnight, July 2013)
IMF launches MOOC on finance (June 2013)
MOOCs - an education revolution (New Scientist)read more...»
Here is a great example of the fast-changing dynamics of the computer gaming industry. Indie gaming studios are proving more nimble, innovative and ultimately smarter than the blockbuster console franchises who have dominated the industry for years. The rise of smartphone and tablet gaming has spawned a new type of gamer and a new type of game with opportunities and challenges for all players.read more...»
Stop smoking, eat less, exercise more, pay your taxes on time. So many things governments want us to do; so hard to get us to do them. HARDtalk's Shaun Ley from the BBC programme Hard Talk speaks to behavioural economist Richard Thaler who thinks he has the answer. It's called 'nudge' theory.read more...»
A summer hat tip to George Layton from the Judd School in Kent for spotting this great example of a behavioural nudge by the local council. Have you got some examples of nudges that you have come across? Please email us with your finds (ideally with a picture) and we will add to this blog!read more...»
Potential defaults in the Euro zone have been in the news again. In Portugal, the ruling coalition parties and the main opposition Socialists have been unable to agree on a European Union-led bailout plan after days of talks. Yields on the country’s 10 year bonds have approached 7 per cent, compared to the 1.5 per cent in Germany. There has been some improvement this week on the news that an early general election has been avoided, but yields still remain over 6 per cent.read more...»
Jez Groom from Ogilvy Change gives a superbly clear and deeply interesting short talk here on how Ogilvy Change worked with the The Times and the Sunday Times to persuade more people to lock themselves into their digital subscription business model. Chunking, choice architecture and price anchoring all make an appearance in helping to explain "the missing £2"read more...»
Paul Craven discusses aspects of behavioural finance in this 25 minute talk from Nudge Stock at Digital Shoreditch in London. Find out how a piece of grilled cheese went for $28,000 on eBaY! This is a superb talk for students and teachers interested in behavioural finance and the common biases in people;s behaviour in markets.read more...»
Here is a video of a talk given at Nudge Blog this summer on how developments in our understanding of networks can be used by businesses in complex marketsread more...»
Here is a lovely example of game theory applied to the battle for the Ashes. Stefan Szymanski looks at how the Prisoner's Dilemma can be applied to the controversy / debate over whether a batsman should walk or stay at the crease when he or she has nicked one to the wicket-keeper or the slips. Click here for the blog article
The design or architecture of auctions can have a huge bearing on their final outcomes be it the auctioning off of 4G spectrum licences or the need for an efficient system for when the Bank of England is lending to commercial banks. This super short video from the Guardian reflects on the work of Paul Klemperer from Oxford University. The specific example covered in the video is the "product mix auction" - a system devised for when the Bank of England uses auctions to determine how to inject liquidity into the banking system.
Hammering LIBOR (The Economist)
The Devil is in the Detail (Tim Harford)
A super resource from the Economist. KAL, The Economist's resident cartoonist and animator, explains the dangerous history of bubbles.
A bubble is said to happen when the prices of securities or other assets rise so sharply and at such a sustained rate that they exceed valuations justified by fundamentals, making a sudden collapse likely (at which point the bubble “bursts”). Typically this is seen in property markets where housing valuations can rise to unsustainable levels relative to income or long-run average prices. Speculative demand driven by positive price expectations has the effect of amplifying market demand and driving prices higher - especially when supply is restricted and unresponsive to short-term price movements.
Bubbles are common in other asset markets such as for stocks and bonds. And increasingly we find that world commodity prices exhibit bubble tendencies with high levels of volatility in the prices of foodstuffs, oil and natural gas and metals.
The bursting of a bubble - such as a collapse in property prices - can have important demand-side effects on wealth, confidence and aggregate demandread more...»
FOOD banks are a rapidly growing phenomenon in the UK. A few years ago, they barely existed, but an estimated half a million people now make use of them every week. On the face of it, it seems that poverty has sadly become endemic since the financial crisis, with many families unable even to feed themselves. Real incomes have declined since 2007, putting pressure on household budgets. But the pace of increasing demand is surprising.
In fact, the food bank is a market. It is, however, complex – with particular features which mean that it is likely to grow rapidly, exactly as we have seen. The key point is that food is not the only commodity traded.
"All money is virtual, and always has been – because money is just a set of ideas."
What is the real nature of money? In his new book 'Money: The Unauthorised Biography', Felix Martin suggests the modern approach to money - what we think it is and how it works - is wrong. He tells the FT's Andrew Hill why the conventional economic view is misguided and dangerous. Martin believes that we should view money as a social technology, a set of ideas and practices for organising society.
Martin argues that we shouldn't be afraid of using monetary policy as a deliberate technique for the re-distribution of income and wealth, for example for using higher inflation targets for "sweating off debt" as an alternative to persistent austerity. How might a different (unconventional) conception of money affect the types of banking system that we might want to emerge after the crisis? To what extent should the state radically narrow the range of financial institutions to which it is prepared to offer emergency financial help?read more...»
Firstly, I hope the first AS exam went well, whether that was macro (OCR), micro, and whether for the first time or a retake. I also hope that in amongst the revision you’re in the market for a more random blogpost…
This one’s a topic on which Paul Ormerod would have something to say. On NPR’s Planet Money radio show/podcast, they’re launching a T-shirt, and using this as a stimulus for a whole set of reporting on its genesis, from cotton subsidies to its design. The latest podcast investigated the colour of their T-shirts. “What’s the economics in that?”, I hear you cry…
What is it worth to take someone else’s speeding points? The Huhne-Pryce case has brought this into sharp focus. Setting aside the moral issues, the question raises interesting topics in economics.
It turns out that there is a market in these points. The Daily Telegraph discovered that prisoners are willing to take points. By the time they get out, the points will often have expired. For around £200, someone will take your three points. But mingling with a group of England supporters after the Wales debacle on Saturday, their tongues loosened by alcohol, I discovered that one respectable woman claimed to have done it for £500.
Just over a month ago, a group of young men from a fairly yokel part of Australia posted a video on YouTube. Nothing remarkable about that. Except that the video now has over 21 million viewings. More than 170,000 variants of the original theme have been posted on YouTube. A few have received even more viewings than the original, with one notching up over 63 million.
The wider repercussions have been even more dramatic. Australian miners have been sacked for recording their on version underground. People have been arrested in Russia for copying it on a World War Two tank. In Israel, two soldiers have been jailed. A flight from San Diego is the subject of a major investigation when the passengers attempted to redefine the Mile High Club and create a version in mid-flight.
This phenomenon of popular culture is called the Harlem Shake. Its essence is that a group of people perform a comedy sketch, accompanied by excerpts from the 1980s hip-hop song of the same name. King Lear it is not.read more...»
It has suddenly become fashionable to be concerned about China’s growth rate slowing down. This is not a matter of a short-run cyclical downturn, with normal service being resumed shortly as the economy roars ahead once more. It is a worry that there will be a permanent slowdown by the end of this decade. Instead of annual growth rates around 10 per cent and even more, the Chinese economy will settle down to the much more sedate rates seen in the West in the 1950s and 1960s in the range 3 to 5 per cent.
Although it's not been too bad in my area, the recent cold snap is another example of the extreme weather we've seen a number of times in recent years. But what does extreme mean in this case? This isn’t a hurricane. It’s extreme in the sense that it’s unusual. This weather would not faze the Finns or Swedes. They are equipped for this weather, so surely we too could avoid the loss of a work/school day by some investment.
Mark Johnston provides this introduction to behavioural finance. As with behavioural economics, the conventional view of finance assumes that markets are efficient and that the price of shares, bonds and other financial instruments are a reflection of the fundamental economic values that they represent. Behavioural finance is all about understanding why and how financial markets are inefficient. If there is a difference between the market price of a share or bond and its fundamental value then in conventional economics no one can make money in financial markets by exploiting the difference.read more...»
Tragedy struck at a mid-week game played during the holiday season in Football League Division Two. The pies ran out in the home supporters’ bar. The incident may seem trivial to those not involved. Yet it illustrates some important themes in economics, which have even gained their inventors the Nobel Prize.read more...»
I ran a short optional course in aspects of behavioural economics last term and this streamed presentation contains some of the slides from a few of the sessions. I enjoyed teaching it - this is a part of the subject that really ought to have greater prominence in the AS / A2 syllabus and students enjoy researching some of the potential practical applications of ideas drawn from behavioural in addressing economic and social problems and issues. Click on the behavioural economic blog category - here - for more teaching resources.read more...»
Here is a superb blog from the Economist magazine into a digital business built around the Freemium pricing model and where network effects are strong. Also good for understanding market contestability and the impact of new entrants on profit margins. Dropbox is my preferred file sharing system, I am pretty much locked in and wouldn't change!
Freemium is a business model in which some basic services are provided for free, with the aim of enticing users to pay for additional, premium features or content
In this edition of Meet the Author, the BBC's Nick Higham talks to the Lebanese-American author and former derivatives trader Nassim Nicholas Taleb about his new book, Antifragile: How to Live in a World We Don't Understand.
More reading here on Taleb's new book
Seven rules of anti-fragility (Farnham Street Blog)read more...»
Forecasts of the end of the world have an even worse track record than predictions in economics. Some followers of the Mayan calendar believe the world will end next week.
But we have been here before. In 1956, an American group, led by a suburban housewife, believed that a catastrophic flood would destroy the world on a specific date. Concealing his true identity, a leading American social psychologist, Leon Festinger, had joined them several months previously. When the flood failed to happen, he noted that, far from abandoning their beliefs, the members became even fervent in their view that the world was about to end.