Presentation on theme: "When information hurts Markets, Games, and Strategic Behaviour By Todd Kaplan."— Presentation transcript:
When information hurts Markets, Games, and Strategic Behaviour By Todd Kaplan
Insurance Problem You have a fantastic job as a professional video-game player that pays £100,000 per year. The group Parents against Violence of Videogames PAVLOV secretly put subliminal messages in the video game Halo2. These messages will cause a condition in people that have played Halo2 at the start of the year 2007. This will cause players to start drooling whenever they shoot people in video games. Such drooling is detrimental to playing the game at a world-class level. Fortunately, this condition is only triggered in roughly half the population that played Halo2.
Insurance Problem 2. Also fortunately, several expensive sessions with a renowned psychologist can cure the condition. The cure is worth it and costs £100,000. There is an insurance company that may offer you insurance for a price of £60,000. You have to decide on whether or not to buy the insurance if it is made available. (Assuming that you purchase the cure whether or not you have insurance.) At the same time, the insurance company has to decide whether or not to offer the insurance. The payoffs for both the company and the video game player are displayed in the following table.
Payoffs Payoff in utils. Why is the payoff to a player buying insurance 60?
Expected payoffs w/o Information What is the expected payoffs? What are the Nash equilibria?
With information. Microsoft announces that it has a downloadable program that will present a test that will tell the player for certain whether or not she/he is susceptible to the subliminal messages. What are the equilibria when a player knows his type? What are the equilibria when the seller knows the players type and the player doesnt? What are the equilibria when they both know a players type? What are the expected equilibrium payoffs? Does the information help anyone?
Other Insurance Examples Examples: –Genetic testing Breast Cancer, etc. –Car insurance. (I know if I am a safe driver.) –Banking (Diamond-Dybvig)/ Pensions. Bank wants to provide steady return. Banks can keep temporary returns secret. If depositors learn state of investment is low, then they may withdraw early. Note problem exists if only the buyer knows, only the seller knows, both know, or simply if a test is available.
Solutions Ban testing. Of course there are other concerns involved knowing. Mandatory insurance: everyone must buy insurance and the provider must sell to everyone.