Republic of Beliefs

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.

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More on game theory

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, [amazon_link id=”0571212921″ target=”_blank” ]A Beautiful Mind[/amazon_link]. 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. [amazon_link id=”0691095272″ target=”_blank” ]The Essential John Nash[/amazon_link] 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.

[amazon_image id=”0691095272″ link=”true” target=”_blank” size=”medium” ]The Essential John Nash[/amazon_image]   [amazon_image id=”0571212921″ link=”true” target=”_blank” size=”medium” ]A Beautiful Mind[/amazon_image]

For more on game theory, one very enjoyable historical perspective – looking too at other uses of mathematics in economics – is Paul Strathern’s [amazon_link id=”0140299866″ target=”_blank” ]Dr Strangelove’s Game: A Brief History of Economic Genius[/amazon_link]. 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 [amazon_link id=”0691130612″ target=”_blank” ]Theory of Games and Economic Behaviour[/amazon_link] 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 [amazon_link id=”0393337170″ target=”_blank” ]The Art of Strategy[/amazon_link] – 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.

[amazon_image id=”0140299866″ link=”true” target=”_blank” size=”medium” ]Dr. Strangelove’s Game: A Brief History of Economic Genius[/amazon_image]  [amazon_image id=”0691130612″ link=”true” target=”_blank” size=”medium” ]Theory of Games and Economic Behavior (Princeton Classic Editions)[/amazon_image]  [amazon_image id=”0393337170″ link=”true” target=”_blank” size=”medium” ]The Art of Strategy: A Game Theorist’s Guide to Success in Business and Life[/amazon_image]

Dr Strangelove, an atypical economist

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.

Introducing game theory

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 [amazon_link id=”1906924775″ target=”_blank” ]Economic Fables[/amazon_link] (I loved this book so much it was the Enlightened Economist Book of the Year in 2012)

[amazon_image id=”1906924775″ link=”true” target=”_blank” size=”medium” ]Economic Fables[/amazon_image]

[amazon_link id=”0273684965″ target=”_blank” ]A Guide to Game Theory[/amazon_link] Fiona Carmichael

[amazon_link id=”038541580X” target=”_blank” ]Prisoner’s Dilemma: John Von Neumann, Game Theory and the Puzzle of the Bomb[/amazon_link] by William Poundstone

[amazon_image id=”038541580X” link=”true” target=”_blank” size=”medium” ]Prisoner’s Dilemma: John Von Neumann, Game Theory and the Puzzle of the Bomb[/amazon_image]

[amazon_link id=”0669246034″ target=”_blank” ]Fun and Games[/amazon_link] by Ken Binmore, or his [amazon_link id=”0199218463″ target=”_blank” ]Game Theory: A Very Short Introduction[/amazon_link]

[amazon_image id=”0669246034″ link=”true” target=”_blank” size=”medium” ]Fun and Games: A Text on Game Theory[/amazon_image]

[amazon_link id=”0393062430″ target=”_blank” ]The Art of Strategy[/amazon_link] or [amazon_link id=”0393310353″ target=”_blank” ]Thinking Strategically[/amazon_link] 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, [amazon_link id=”0415094038″ target=”_blank” ]Game Theory: A Critical Introduction[/amazon_link] Shaun Hargreaves Heap and Yanis Varoufakis

Finally, some recommended online lectures – Ben Polak’s Yale course.