I’ve just devoured the proof copy of Kaushik Basu’s The Republic of Beliefs: A New Approach to Law and Economics, which is due to be published in June. It’s too early to post a review but I can’t resist a quotation from the intro: “For the law to develop roots and the rule of law to prevail requires ordinary people to beliefe in the law; and to believe that others believe in the law. Such beliefs and meta-beliefs can take very long to get entrenched in society.” The book addresses a key contradiction in standard law and economics models, for my mind in a thoroughly convincing and accessible way despite it being 100% game theoretic.
In my years in various policy roles, it’s always amazed me how few policy makers think in terms of how all the other parties involved will respond to their interventions, and how in turn they ought to adjust what they do. I’ve always revered Thomas Schelling, who did apply game theory to policy. Republic of Beliefs might be joining his Micromotives and Macrobehavior in my pantheon of must-reads. It certainly should prompt a more rflective (or reflexive) approach to setting policy.
The death of John Nash with his wife Alicia in a car accident is a sad, sad end to a remarkable life. The story of Nash’s genius, madness and recovery is well known thanks to the movie based on Sylvia Nasar’s wonderful biography, A Beautiful Mind. There have been many obituaries and appreciations. This VoxEU column is an excellent outline of why Nash’s work was so important for economics.** John Cassidy has a nice New Yorker column. The Essential John Nash is certainly worth a go – there are pdfs of the introductory material on the Princeton University Press website – and there is plenty of material on the Nobel prize website.
For more on game theory, one very enjoyable historical perspective – looking too at other uses of mathematics in economics – is Paul Strathern’s Dr Strangelove’s Game: A Brief History of Economic Genius. It starts with John Von Neumann (giving the impression that Peter Sellers as Dr Strangelove only slightly overacted the role), and Morgenstern ad Von Neumann’s Theory of Games and Economic Behaviour and ends with John Nash. Interestingly, Strathern focuses on the difference between co-operative and non-cooperative games rather than zero and non-zero sum. As for the uses of game theory in life, rather than just economics, my favourite book is Dixit and Nalebuff’s The Art of Strategy – it has a website where you can read an excerpt.
Step one in using game theory in life is just to think about how other people will react to your actions – something so easy to say, yet so rarely done.* And how paradoxical that something that seems like common sense had its roots in unusually tortured genius.
Dr Strangelove, an atypical economist
*I remember once saying to a room full of policy economists that figuring out the Nash equilibrium in the context of a decision different EU governments were making at the same time meant our policy advice was a no-brainer; not all of them got the point.
** Update for econ anoraks: Note the nice description here of Nash’s bargaining solution as a Possibility Theorem, published at the same time Arrow developed his Impossibility Theorem. I think it’s the unrestricted domain axiom that makes the difference.
A question in the comments: what books are suitable to introduce game theory to a young reader? I asked on Twitter and got loads of good replies – huge thanks to all who made suggestions:
Ariel Rubinstein’s Economic Fables (I loved this book so much it was the Enlightened Economist Book of the Year in 2012)
A Guide to Game Theory Fiona Carmichael
Prisoner’s Dilemma: John Von Neumann, Game Theory and the Puzzle of the Bomb by William Poundstone
Fun and Games by Ken Binmore, or his Game Theory: A Very Short Introduction
The Art of Strategy or Thinking Strategically by Avinash Dixit and Barry Nalebuff (I’ve read these, too, and they’re pitched at a business audience so very accessible)
A critique of game theory, Game Theory: A Critical Introduction Shaun Hargreaves Heap and Yanis Varoufakis
Finally, some recommended online lectures – Ben Polak’s Yale course.