One of the fundamental philosophical questions I have while growing up is, are people necessarily rational? Further, does the level of rationality increase with the degree of smartness of individual? And if individuals are not necessarily rational, is there a method in the madness? And, can the biases human beings have be systematically identified? These are some of the questions around which I and Prof Jeevant Rampal (a colleague and a friemd) designed a course on Game Theory and Experiments.
The course has two parts, with the first part dealing with the ought to behaviour. Specifically, in the first part, we look at some interesting phenomena like how some strategically savvy individuals doing what is best for themselves end up failing to recognize an obvious win-win situation. Such situation, commonly referred to as prisoners' dilemma - can explain why there are price wars, religious norms, arms races etc. This further extends into the notion of Nash Equilibrium, a novel concept which has revolutionised the understanding in social sciences at large. Some of the main applications we discuss include low equilibrium traps, emergence of digital markets, innovation strategies, etc. Following this, the course moves towards cases where people and firms tend to cooperate with each other. This concludes with discussion on situations where asymmetric information is norm. Specifically, we look at some special themes like losing by winning (Winnersí Curse), adverse selection problem, moral hazard, etc. In all these discussions the underlying theme is that people are rational, and are capable of making decisions as if they are well trained computer algorithms.
Here comes the second part that challenges that assumption and depicts how humans actually behave. Experimental economics, an emerging field in economics, thrives on conducting experiments involving humans a subjects. While the first module allows us to predict the ought to behavior, the second part allows us to measure actual behavior and juxtapose both of them against each other. By varying the conditions under which experiments are conducted, one could also, perhaps, understand why there is a difference between both these behaviors. We not only look at how humans behave, but also how the behaviour can be manipulated. Specifically, we look at some interesting phenomena like decoy products, anchoring effect, prospect theory, etc.
In some sense, the course is a jugalbandi between homo sapiens and homo economicus, a mythical creature that adheres to strict principles of rationality. The course allows us to look at some of the basics of strategic decision making, and derive some fundamental insights into understanding the world around us. That it also provides some insights into consumer behavior, and perhaps, helps managers take effective decisions, is a nice by-product!
Game Theory and Experiments is a fifteen session course that is open to the PGPX students (One Year MBA program) and is taught by Profs Viswanath Pingali & Jeevant Rampal.
About The Authors
Ph.D., Department of Economics, Northwestern University, 2007
M. A. (Economics), Northwestern University, 2002
M.S. (Quantitative Economics), Indian Statistical Institute, Calcutta, 2001