Economics in Action

Following my last post, I have been given a great article by Peter Sozou and Robert Seymour (titled “Costly but worthless gifts facilitate courtship“) about the application of game theory in relationship issues. This unconventional article on game theory shows the great power economists have to solve social problems. It is free and worth reading if you are keen on studying game theory.

And apparently, intrinsically worthless gifts (e.g. an engagement ring?) are great signals.

So, one week of micro basic game theory revision can drive you to the edge of insanity… Talking to certain people about their love problems has definitely pushed me over that edge. Here is my analysis of love as a dynamic game of imperfect information. Enjoy!

THE SETUP:

I will base my analysis on a simple two-players model, which can be extended to create love triangles, quadrangles, etc… We have players A and B, who have concave utility functions, and hence are both risk-averse (i.e. they prefer certainty over an uncertain prospect). People are risk-averse to different degrees, and this will affect the payoffs each player faces, and as a result, the way the game is played. In this game, I will assume that both players are very risk-averse (which is true in most cases). Both players are trying to maximise their payoffs.
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Photo by Bayat on Flickr

Two odd pieces of economic research have been highlighted in the Ig Nobel Prizes, awarded each year by the magazine the Annals of Improbable Research.

The first study examined tips given to lap dancers. Unfamiliar with lap-dancing, Geoffrey Miller and colleagues read up on the relevant sociological and feminist literature before getting eighteen dancers to record their earnings for two months. They found that earnings were greater when the dancers were ovulating: the male patrons expressed a preference for dancers who were currently fertile, even if not consciously aware of the difference.

The other study was by behavioural economist Dan Ariely and colleagues, who found that the placebo effect of a pill was weakened when the pills were discounted in price. In other words, some medicines are more powerful in virtue of being more expensive.

The full references are Geoffrey Miller, Joshua M. Tybur, Brent D. Jordan (2007) “Ovulatory Cycle Effects on Tip Earnings by Lap Dancers: Economic Evidence for Human Estrus?” Evolution and Human Behavior, vol. 28, 2007, pp. 375-81; and Rebecca L. Waber, Baba Shiv, Ziv Carmon, Dan Ariely (2008) “Commercial Features of Placebo and Therapeutic Efficacy” Journal of the American Medical Association, March 5, 2008; 299: 1016-1017.

Matthew Reisz reports in the Times Higher Education about the rebirth of economics, ‘today the “dismal” science of economics is sexy’. Tim Harford and Stephen Levitt are held somewhat responsible for the distinct change in attitude, with simple economics being used to explain anything from ‘rational crime’ to ‘the teenage oral sex craze’.

The publication of The New Palgrave Dictionary of Economics compiles contributions from not only 1500 economists but also other fields, a Swedish zoologist for example, supporting the end of ‘dismal’ economics.

Read more: Matthew Reisz (2008) Figure It Out Times Higher Education

Human beings ability to cooperate with each other lies behind our success as a species. But since the skills of coalition-building are essentially for masculine activities notably hunting and warfare they have also been the key to mens subjugation of women.

That was the central message of Professor Paul Seabright when he delivered the 2005 Royal Economic Society Public Lecture on Thursday 8 December in Edinburgh and again on Friday 9 December in London.

Professor Seabrights lecture took his audience through a tour of the many ingenious strategies that males and females have used to manipulate their partners and rivals, from primates to prehistoric humans to modern men and women. He concludes:

Cooperative man was the key to our civilisation but he has used his success to isolate, confine and control the women in his life.

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This is the title of a research paper by economists Lena Edlund and Evelyn Korn, in which they consider the relative appeal of marriage and prostitution for women, and (closely linked) the relative appeal of wives and prostitutes for men.

Michael Noer in Forbes magazine shows wittily that the economic perspective on marriage is bleakly unromantic, but admits the point of the research is not to illuminate romantic feelings (for which we already have a culture’s worth of art and poetry) but to answer a specific question, namely, “Why do prostitutes earn so much money?” Is it compensation for the violence and disease which they are exposed to, or compensation for the fact that no-one wants to marry a prostitute?

Found via the book Economics Uncut: A Complete Guide to Life, Death and Misadventure, edited by Simon Bowmaker, which has many examples of economic research into topics like drugs, crime, abortion and gambling and includes Edlund and Korn’s original paper.