bus.dec.lec.22 - Myopia Projection and Static Reasoning...

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1 Myopia, Projection, and Static Reasoning Business Decisions SOC 138/ECO 149
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2 Bounded Rationality and Strategic Behavior Just as bounds on human rationality affect simple decisions, so too is strategic behavior affected Modeling of other players, identification of equilibria complex – heuristics used to simplify things In social contexts, these heuristics may interact with each other in surprising ways Sometimes they work better than one might think On the other hand, sometimes they fail spectacularly….
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3 Myopia For sequential games, “look forward and reason backward” can involve a lot of steps Memory is a finite resource – we just can’t look more than a few steps ahead DeGroot’s chess players: even grand masters only look a few moves ahead (and very narrowly, at that) Given this, players may sometimes treat finite games as infinite Can lead to very different behavior from perfect rationality
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4 Example: Iterated Prisoner’s Dilemma In the iterated PD, individual PD games are played each round Infinite game: cooperate (for reasonable discount rates) Finite game: defect Myopic play Can’t see the end of the game, so treat as infinite Cooperate until end is visible – then suddenly defect! 0 5 0 -1 -1 3 5 3 Cooperate Defect Cooperate Defect I. II.
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5 Myopia and Boundedly Rational Bubbles To foreshadow next lecture’s topic a bit, myopia can exacerbate speculative bubbles Rational expectations: we adjust today for what (we think) tomorrow will bring If we are myopic, we will tend to assume that current trends will continue forever (see also law of small numbers) “20% growth per year, forever!” “It’s the New Economy!” "Housing prices never go down!"
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