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Can you rationalize who you should hit on at the bar?

http://www.gametheory.net/News/Items/117.html

For anyone who’s seen the movie A Beautiful Mind, or even paid attention in class, you know that John Nash was a genius.  He came up with the Nash equilibrium theory, which we recently learned about in class as it applies to bargaining.  He even won the Nobel Prize in economics for the theory.  The movie introduces it as he and his friends are sitting in a bar, deciding which women to approach.  The hot blonde attracts all of them, but that’s when John Nash stepped in and changed all of their chances.  If their whole group went after the blonde they would have an extremely low chance of success. If they each went for the brunettes and ignored the blonde, their chance of “winning” was much higher.  Years later however, as the article discusses, in the late 1990’s economist Thomas Palfrey pointed out that the issue at the heart of the Nash equilibrium is that you cannot rationalize people.  No doubt Nash’s math is flawless, but there’s never a guarantee or even a good chance that everyone in a situation will take the most rational outcome.

This realization has helped economists study why people constantly overbid at auctions.  Palfrey still agrees with Nash in that there is a distinct “best” strategy in every situation, what he refers to as the “quantal response equilibrium.”  His addition however, is that people are more afraid of losing the object altogether than of spending more.  Risk aversion and random mistakes raise bids, resulting in a payoff that is significantly lower than predicted by Nash.  The biggest issue in overbidding, which could not be predicted by Nash’s super-rational theory, is the snowball effect.  Once one person overbids, it is next to impossible to stop everyone else from bidding too high as well.

The studies that Palfrey now runs apply even more to the world around us.  When everyone who bids has to pay, regardless of whether or not they won, it becomes more applicable.  The article cites “political campaigns, where even losing candidates have to spend a fortune, and mating contests in nature, where two males may fight to the death for a single female” as very relatable situations.  He draw parallels between bidders and a person feeding a parking meter.  Even if there is an extremely low chance of the attendant coming around and handing out tickets, people will still overpay their meter.

Perhaps eventually our society will learn enough about bargaining techniques and how other people approach a bidding situation that we will conform to Nash’s equilibrium, but until then we will just have to settle for overpaying our parking meters for fear of $30 tickets.

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