Module 12.5 Trust and Fairness Lecture

Prisoner's Dilemma and Cooperation

• Basic Scenario: In the prisoner's dilemma example, individuals such as Steph and Tanya both choose to indulge in video games rather than cooperating to clean.

• Nash Equilibrium: In scenarios like Brianna and Carlos's choice between studying or shirking, a Nash equilibrium can occur where one studies while the other shirks.

• Real-life Implications: Efforts to cooperate are more prevalent in repeated games versus single interactions.

Repeated Games

• Continuous Interaction: People like Carlos are disincentivized to free ride off Brianna regularly; their relationship hinges on long-term cooperation to benefit both.

• Importance of Reputation: Trust and reputation are critical; if Brianna has a reputation for being lazy, others will hesitate to work with her in the future.

• Trust in Exchanges: The need for credibility discourages unfair practices. For instance, mechanics and restaurants generally maintain high standards because a bad reputation can lead to loss of business.

The Role of Trust

• Market Dynamics: Trust differentiates successful economies from unsuccessful ones. The lack of trust compels individuals to invest excessively in protection against scams, hindering efficient trading.

• Communication Barriers: Poor communication, such as in online disputes, leads to misunderstandings and conflict, emphasizing the necessity of face-to-face interactions.

Social Distance and Cooperation

• Definition of Social Distance: Refers to the proximity to others, impacting cooperation; people are more likely to collaborate with those they identify with.

• Research Findings: Dr. Reagan Petrie conducted an experiment showing that visual familiarity increases contributions in public goods games significantly—participants contribute more when they can see each other.

Social Norms and Fairness

• Behavioral Expectations: Norms guide acceptable behaviors; fairness plays a critical role in evaluations of offers in economic interactions.

• Ultimatum Game Example: In this game, Vince can propose a split of $10 with Rochelle, and he often offers around a 50-50 split despite potential gains from lower offers.

• Rationality in Behavior: People reject unreasonably low offers, even under economic pressure, reflecting a concern for utility, reputation, and social norms over mere financial gain.

Practical Applications of Economic Concepts

• Decision-making Strategy: In any transaction, consider the other person's incentives and actions. Reflect on whether the interaction is repeated and the significance of reputations.

• Enhanced Decision Maker: Adopting these lessons aids in effective decision-making by evaluating actions from others' perspectives.