Playing Games
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RESEARCH & Society ECONOMICS Playing Games Ten years ago, it is more than likely that others in the profession would have shaken their heads in despair over the research methods employed by DR. AXEL OCKENFELS of the MAX PLANCK INSTITUTE FOR RESEARCH INTO ECONOMIC SYSTEMS in Jena. Or simply dismissed him as an outsider on account of his penchant for using real people to put his theories to the test – for example, by exposing his students to the “prisoner’s dilemma”. What should one make of an economist who spends as much time in the laboratory as many a chemist, and who actually films his “guinea pigs” as they struggle with specific game-playing situations? For most economists, that would have been taking things just a little too far. Chess is not the only game of strategy – the moves that make up economic behavior owadays economic science is no stran- toral thesis that was hailed by the Economic patterns could Business School before returning to Germany if only to take account of human error and Nger to experimentation. Dr. Ockenfels is Science Association as the best of the year; at also be described to take up a post as research group leader on certain moral concerns. However, in terms of a man in great demand. The 33 year-old pro- 33 he gained his post-doctoral qualification as such. Who bids the Emmy Noether Program run by the theory, such deviations from the norm played ject manager simply cannot accept all of the at the University of Magdeburg, picking up what and when in Deutsche Forschungsgemeinschaft (DFG). no more than a subordinate role. an online auction? invitations he receives. From Harvard to another research prize on the way. He has Ockenfels attributes the quality of his train- But just how do people behave when mak- Berlin, Utrecht to Oxford, Ockenfels has al- added to his experience by working in the Innovative talent: ing above all to Reinhard Selten: “He was my ing day-to-day decisions in their business Axel Ockenfels, ready presented his theses in countless audi- Management and Information Systems de- 33, of the Max academic teacher, my mentor, and a stroke of lives? Are we really as forward-looking, toriums in Europe and the USA. Universities, partment at Penn State University in Penn- Planck Institute luck for my career.” rational and self-interested as economic companies and economic associations are sylvania, and in 1999 he spent a year as a for Research It was while Ockenfels was busy with his science would long have had us believe? starting to take notice of this young man who Postdoctoral Research Fellow at the Harvard into Economic master’s thesis that his professor was award- Reinhard Selten’s pioneering work in experi- works with the Strategic Interaction Group Systems in Jena. ed the highest of honors: in 1994 Selten, who mental economic research has forever shaken under the leadership of Werner Güth, a new has spent almost 50 years researching into the construct of earlier economic ideas, as research group that was only recently set up game theory, became the first and so far only evidenced by the award of the Nobel Prize for in Jena, in July 2001. German to be awarded the Nobel Prize for Economics in 2002. In selecting the two Ockenfels is one of the most innovative tal- Economics. However, even while the Swedish Americans, Daniel Kahneman and Vernon ents in a sub-discipline, which is growing Academy was praising his achievements in Smith, the Swedish Academy of Sciences progressively more influential in the world of the theory of games, it was impossible to chose to honor two researchers who, like economics. So who is this unusual economist overlook the fact that Selten was also one of Selten, have radically questioned the nature whose academic career took off in a flash and OCKMARKET the most vehement critics of many of the ba- of homo economicus through their work T who has already been offered professorships -S sic tenets of classic economics. Selten recog- with experimental subjects in the laboratory. both at home and abroad? To describe Ock- ORBIS nized at an early stage that most economic Kahneman, who teaches psychology at Prince- / C enfels as determined would be an understate- models are based on false premises: namely ton University, shared joint responsibility for ILSER ment: at the age of 25 he earned a prize-win- F on the assumptions that humans are rational developing the “Prospect Theory” with his ning degree at the University of Bonn; at 29 OLFGANG beings motivated only by their own self-in- late colleague Amos Tversky, who died in he completed his doctorate under the super- : W terest. Deviations from these assumptions 1996. On the basis of experimental findings, HOTOS vision of Joachim Weimann, writing a doc- P had been acknowledged in individual cases, this theory postulates that human beings 64 M AXP LANCKR ESEARCH 1/2003 1/2003 M AXP LANCKR ESEARCH 65 RESEARCH & Society ECONOMICS often make decisions spontaneously – less on in the first place. It is an interesting fact that game” in which several competitors take part rational grounds than as a result of a given economists frequently leave the laboratory is aimed specifically at competitive situations situation. People have a tendency to overesti- empty-handed. “They assume themselves to in an anonymous market. And here it is evi- mate and attach too much weight to new in- be extremely cunning, and coldly offer the dent that considerations of fairness can have formation, as Kahneman demonstrated with absolute minimum,” says Ockenfels. no impact on market performance since the his “nervous frogs theory”, using dollar fluc- The “ultimatum game” is related to the participants are no longer able to influence tuations as an example. Vernon Smith, who “dictator game”: here Player A is at liberty to the distribution simply through their own be- carried out some of the first laboratory ex- split up any sum of money at will, while havior. Under extreme competitive condi- periments at around the same time as Selten, Player B, on the other hand, is unable to veto tions, so the study indicates, the classic self- is regarded as the pioneer of experimental the split. Many “dictators” give their partner interest hypothesis works well, even if the methodologies in the USA. what seems to them to be a fair share – on players would, in principle, prefer a fairer The work done by Axel Ockenfels is in- average, about a quarter of the profits. A distribution. spired by the theoretical and experimental similar phenomenon is to be observed with Game theory and experimental economics endeavors through which his teacher Rein- the “prisoner’s dilemma” that has likewise undoubtedly has its educational attraction, hard Selten revolutionized this field of re- been the subject of much research and is believes Ockenfels. He uses auction games on search. “Very simple, but enormously infor- studied by economists, sociologists, psychol- occasion in order to provide his students with mative,” says Ockenfels of the “ultimatum ogists, and political scientists alike. Here the an impressive demonstration of their restrict- game” that he and his colleagues at the Max profit accrues to the partner who fails to co- The eBay website, ed rationality. It is simple enough to experi- Planck Institute have been repeating in vary- operate. Therefore in theory, cooperation be- one of the best prospect of a quid pro quo, a fair exchange. ment for oneself: players are asked to esti- ing forms in their laboratory in Jena. Funda- tween two players should never take place. known online Thus, while behavior systematically deviates mate the contents of a glass full of euro coins mentally the “ultimatum” depicts a quite or- The reason: there is a temptation to refuse to auction houses: from standard economic predictions, it is still and then make an offer. “I regularly find that many participants dinary commercial relationship: for example, cooperate at the expense of one’s game part- make their bids clearly strategic in nature. the student who wins the bidding makes a Player A is given 100 euros which he must ner in order to pocket a proportionately high- in the final seconds Axel Ockenfels has published numerous share with an anonymous Player B. If Player er profit. This applies irrespective of whether of an auction. papers in which he investigates complex pat- The winner overestimates the value – B declines the offer, both parties are left emp- one’s partner cooperates or not. “In fact, terns of trading, negotiation and cooperation. and comes to grief ty-handed; if he accepts, each may keep their however, we notice a conditional behavior One of his most recent contributions has been share. According to the theory of homo eco- pattern. Many players are willing to cooper- widely acclaimed even beyond economic cir- bad bargain, there being nowhere near as nomicus, both participants will prefer to have ate, provided that the other does so too. cles. Together with his colleague Gary E. many coins in the glass as he or she expect- more money rather than less. Consequently, These people adopt a reciprocal behavior and Bolton of the Smeal College of Business at ed.” On average, students’ estimates are fairly Player A will keep 99 euros and give Player B in so doing improve their financial position Penn State University, Ockenfels published an realistic. However, since the winner of the far beyond anything homo economicus could essay in the American Economic Review en- auction tends to be the one whose estimate of People don’t just consider their own ever manage.