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Opportunism Fairness

Essay by   •  March 16, 2017  •  Course Note  •  869 Words (4 Pages)  •  680 Views

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Opportunism, fairness and cooperation: assumptions on the behaviors of individuals and groups

Rational offer

I win 100$ but the only way for me to get my 100$ I need to make an offer to someone and I need this person to accept my offer.

The rational offer is to offer him 1 and to keep 99 to myself. You can also offer him 99 because you will maximize your chance of him accepting the offer. You will get one which is better than nothing so you are the perfect rational agent.

Are we really self-interested?

Economic theory says that people should offer 99-1. But, in reality people are more generous (33% offer 50-50)

Economic theory says that people should accept 99-1. But, in reality most people reject anything worse than 80-20.

Two ways to model behavior

Homo Oeconomicus by Léon Walras and human being (Behavioral view) by Simon, Cyert and G.March.

        Homo oeconomicus

He is autonomous and egotistical; his sole interest is to maximize his own income and wealth. At the same time, he is always capable of perfect rationality while evaluating his own choices. His tendency to maximize his own wealth is mitigated only by his desire for free time in which to enjoy the wealth he has accumulated.

  • He has a perfect rationality (it is an assumption; it is a model of decision making).

It is about decisions; it is the way in which human take decisions.

  • The first assumption about perfect rationality is that all info is available and free about all the possible option that we can have (you know all the producers, the prices and all information about the behavior of the supplier).
  • The second assumption is that there is an unlimited elaboration capability.
  • The third one is that all alternatives are known and can be compared.
  • Finally, individual preferences are described by utility functions, we know what we want, we have clear objectives.

  • Individual maximization of utility under given constraints. In a perfect rationality the utility function of the individual is shaped without the fulfillment of social need. Social needs do not shape the utility function. The utility function is assumed to be shape only by individuals’ utilities that are not shape with others

  • Not much room for reciprocity, trust and emotions (isolation). The decisions are only oriented to the individual level maximization of utility
  • Likely to behave opportunistically

Decisional context : [pic 1]

Input: you have decide to invest in an industry, the alternatives are all the industry you can invest in.

The outcome is what you can expect from the different alternatives.

You can order your outcomes and you know all the possible connections.

If I invest in C I’ll have the outcome X.

        Human being

  • Bounded rationality
  • Information are costly and may be not retrievable. You didn’t know all the possible places to get a pizza/sandwich and the prices. The first time you wanted it you had imperfect information.
  • Cognitive limits. The comparability of the different option is very hard

The human mind functions by means of cognitive structures. These affect how information is perceived, selected, codified and stored in one’s memory, and how it is later recalled and interpreted. All these processes impact judgments, assessments…

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