4. The Theories and the Real World 4.3 What the theory does not reflect? (Back to your experiment)

4. The Theories and the Real World 4.3 What the theory does not reflect? (Back to

your experiment)

Strategic Bahavior in Business and Econ

1. Introduction2. Individual Decision Making3. Basic Topics in Game Theory4. The Theories and the Real World

4.1 Applications4.2 Alternative Approaches4.3 What the theory does not reflect? (Back to your experiment)


1. (Tversky and Kahnemann (1986)) An outbreak of a disease will cause six hundred people to die in USA if nothing is done. You are responsible to choose one of the two mutually exclusive health programs:

PROGRAM A: If this program is adopted, 2 hundred people will be saved for surePROGRAM B: If this program is adopted then there is a probability of 1/3 that all six hundred people will be saved, and a probability of 2/3 that no one will be saved

Which one do you choose? (circle one) → A B

Suppose now that the options were:

PROGRAM C: 4 hundred people will diePROGRAM D: With probability of 1/3, no one will die, with probability of 2/3 all six hundred will die

What would be your choice in this case ? (circle one) → A B


PROGRAM A: If this program is adopted, 2 hundred people will be saved for surePROGRAM B: If this program is adopted then there is a probability of 1/3 that all six hundred

people will be saved, and a probability of 2/3 that no one will be saved

PROGRAM C: 4 hundred people will diePROGRAM D: With probability of 1/3, no one will die, with probability of 2/3 all six hundred will die

Programs A and C are the same !. Programs B and D are the same !

Programs A and C: 200 people saved (hence 400 die) for sure Programs B and D: • With p = 1/3 600 people saved (hence 0 die)• With p = 2/3 0 people saved (hence 600 die)

Choosing A and then D (or B and then C) would be a “frame effect”


First Choice

Second Choice

C D

A 15 14

B 0 2


2. (Huber, Pyne and Puto (1982)) Imagine that you are planning to visit Paris and London. An agency offers you 3 options, each of them costs 600 Euros. The first number is days in Paris and the second days in London:

(a) (7,4)(b) (4,7)(c) (6,3)

Which one do you choose? (circle one) → (a) (b) (c)

There is a change in the third option instead of (6,3), now it is (3,6).

Does this change your choice? (circle one) → YES NO


2. (Huber, Pyne and Puto (1982)) Imagine that you are planning to visit Paris and London. An agency offers you 3 options, each of them costs 600 Euros. The first number is days in Paris and the second days in London:

(a) (7,4)(b) (4,7)(c) (6,3)

Which one do you choose? (circle one) → (a) (b) (c) There is a change in the third option instead of (6,3), now it is (3,6).

Does this change your choice? (circle one) → YES NO

If you like Paris better than London, you should choose (a)If you like London better than Paris, you should choose (b)If you like both the same you might choose (a) or (b)If you like to travel a lot (no matter where) you might choose (a) or (b)If you don’t like to travel, choose (c)Some times, after the change in (c), people that chose (b) now chooses (c) This would be a “preference reversal”


First Choice Second Choice

TOTAL

a 18

b 12

c 1

TOTAL

YES 2

NO 29


3. You are supposed to meet a friend, but you do not remember the place. You remember that it was either Arc de Triumph or Plaça Catalunya. Since your plan is to visit the Zoo, it is better for both of you if you meet in front of Arc de Triumph, but there is a high probability that your friend is waiting for you in front of Zurich Cafe in Placa Catalunya.

Where do you go? (circle one) → Arc de Triumph Plaça Catalunya




Plaça Catalunya seems to have a higher probability (maybe because you have met there many times)

Arc de Triomf seems better since it's closer to the zoo

Arc de Triomf has a special characteristic in this specific situation:It's closer to the zoo, it's better for the two of us....It's a “Focal point”




Total

Arc de Triomf 16

Plaça Catalunya 15


4. You have to share a cake with a friend of yours and you have 4 options:

1. to keep it all for yourself,2. to give it all to your friend,3. to share it with your friend4. to pass the decision to your friend in which case, she can either:

4.1 keep it,4.2. give it to you 4.3 share it.

(a) You are the first one to choose. What is your choice?

Circle one → 1 2 3 4

(b) Now you are the second player and it is your turn to play, and you are given a chance to play

(that is, your friend chose 4) What is your choice?

Circle one → 4.1 4.2 4.3


4. You have to share a cake with a friend of yours and you have 4 options:1. to keep it all for yourself,2. to give it all to your friend,3. to share it with your friend4. to pass the decision to your friend in which case, she can either:


(a) You are the first one to choose. What is your choice?Circle one → 1 2 3 4



Circle one → 4.1 4.2 4.3

This is a “mixture” of bargainingIn principle it's a “one shot” bargaining that can become “sequential”

if you pass the decision to your friend







Circle one → 4.1 4.2 4.3

The theoretical solution of a sequential bargaining is to keep all for you (4.1)







Circle one → 4.1 4.2 4.3

The theoretical solution of a one shot bargaining is to share it (3)


First Choice

Second Choice

1 2 3 4

Total 2 4 22 3

4.1 4.2 4.3

Total 0 4 27


5. You have an opportunity to earn some money, you just have to choose between two options (for free !):

(a) 4$ for sure(b) with a probability of 50% you win 0$ and with a probability of 50% you win 8$

Which one do you choose? (circle one) → (a) (b)





Both options have the same Expected Value:

E(a) = $4E(b) = (0.5)·(0) + (0.5)·(8) = $4





Risk avers individuals are those such that:

u(E(L)) > E(u(L))

utility expected value lottery expected utility lottery

Remember





Risk avers people Risk lover people

(a) (b)

Total 19 12

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4. The Theories and the Real World 4.3 What the theory does not reflect? (Back to your experiment)