"Great Things Come From Angst"*

Matthew Rabin (1993) sets out to “Incorporate(ing) Fairness Into Game Theory and Economics.” He, other economists, psychologists and most adults have observed that individuals do not behave like “economic man.” People care about equity. People punish selfishness at the expense of their own welfare. Economic theory does not consider fairness, and Rabin works to rectify this obvious shortcoming.

This paper strikes me personally. Game theory was the first economic subject I studied outside of the classroom. A professor briefly introduced the subject. I bought Morton Davis's Game Theory and Fudenberg and Tirole's upper level textbook. I bought John Nash's biography with the original “Nash equilbrium” paper. I thought game theory described life. If we could define all strategies, payoffs, and rules, we could describe the world. Every decision could be broken down into payoff matrices. The subject infatuated me.

But then I was working at the grocery store and a woman bought a liter of Canada Dry Ginger Ale for $1.39. She could have bought two liters for $1.29. I explained to her that she could throw the extra liter away and still be better off, but she did not care. She bought the one liter bottle. I was perplexed. I told my Dad. He replied: “Son, you have to let people do what they want, and you can't spend your life thinking other people are stupid. She knew what was best for her.”

My Dad was right. Game theory might be predictive if we could decipher utility functions and determine payoff matrices, but we cannot. And if we could, they would be instantaneous and have no practical value. So if Rabin really wants to describe and predict behavior, I assure him that he will fail.

But if Rabin wants to change the way people look at problems, he succeeds. The idea of expectations, fairness equilibriums, and mutual-maxes and mutual-mins is an interesting way to examine problems. His stylized facts and new concepts challenges the logic of Nash equilibrium. Rabin makes economists think.

His examples are also interesting. Especially the idea that one person chickening out is not an equilibrium with his criteria. (Mutual destruction does occur.) His suggestion that monopolies cannot set a profit maximizing price is also interesting. (If Wal-Mart has such market power, why aren't their prices higher?) His labor market suggestion is also a more complete formalization of the employer-employee relationship. (My Dad, Granddad, and uncle are/were entrepreneurs. My Dad and Granddad treat workers kindly and get good effort. My uncle treated people unkindly and got little effort.) Again Rabin challenges conventional game theory, and at the least, he makes readers think.

His assertion that “As the material payoffs involved become arbitrarily small, equilibrium utility levels do not necessarily become arbitrarily small” makes wonderful sense. As anyone who has been in a relationship can attest, the small immaterial things can mean a lot. Rabin's Proposition 6 depresses me. I want to say his wrong, but I cannot. There always seems to be a lose-lose outcome that can occur in every situation.

Rabin's new theory satisfies economist's criteria. It uses equations, calculus, and even has proofs in the appendix. It also attempts to incorporate reality. Anyone who has been in a relationship knows considering others feelings can be rewarding.

But feelings cannot be represented by equations and variables. Feelings change. Feelings grow. Feelings wane. Feelings are completely subjective.

Given this, I do not understand Rabin's conclusions. If he recommends future researchers follow his lead and challenge conventional game theory, I commend him. If he is challenging economists to consider psychology, sociology, marketing, religion, and other things that affect decisions, I commend him. But if he is trying to predict human action, then I suggest he spend some time at a grocery store. The fact is people do crazy things that only make sense to them. Game theory helps us think about these crazy things, but it cannot tell us when or why they occur.

*S.A.