Bounded Rationality Lecture 5 Evolutionary Argument Bounded Rationality Lecture 5 Evolutionary Argument Mikhail Anufriev EDG, Faculty of Business, University of Technology Sydney (UTS) European University at St.Petersburg Faculty of Economics January, 2014 Bounded Rationality Lecture 5 Evolutionary Argument Defense of unbounded rationality 1 The as if defense: people do not possess the information gathering and processing abilities to make rational decisions, but they act as if they do: 1 People learn to behave rationally. 2 Boundedly rational behavior is driven out by evolutionary pressure or ‘arbitrage opportunities’. 2 Assumption of rational choice disciplines economic modeling, whereas there is a “wilderness of bounded rationality” (with typically an ad hoc nature) Bounded Rationality Lecture 5 Evolutionary Argument Evolutionary Argument Outline 1 Evolutionary Argument Evolutionary Stable Strategy Evolutionary Models 2 If there are multiple equilibria, which equilibrium do people play? Important questions: 1 Do people play Nash equilibrium? Unexpected turn (Evolutionary Game Theory) Nash equilibrium idea can be applied even when there is no any reasoning but as a result of “natural selection” of different behavior Bounded Rationality Lecture 5 Evolutionary Argument Evolutionary Argument Evolutionary Stable Strategy Game Theory Standard view: people should play Nash Equilibrium they derive Nash equilibrium by reasoning (study the game, maximize payoff, predict the behavior of the opponent) Unexpected turn (Evolutionary Game Theory) Nash equilibrium idea can be applied even when there is no any reasoning but as a result of “natural selection” of different behavior Bounded Rationality Lecture 5 Evolutionary Argument Evolutionary Argument Evolutionary Stable Strategy Game Theory Standard view: people should play Nash Equilibrium they derive Nash equilibrium by reasoning (study the game, maximize payoff, predict the behavior of the opponent) Important questions: 1 Do people play Nash equilibrium? 2 If there are multiple equilibria, which equilibrium do people play? Bounded Rationality Lecture 5 Evolutionary Argument Evolutionary Argument Evolutionary Stable Strategy Game Theory Standard view: people should play Nash Equilibrium they derive Nash equilibrium by reasoning (study the game, maximize payoff, predict the behavior of the opponent) Important questions: 1 Do people play Nash equilibrium? 2 If there are multiple equilibria, which equilibrium do people play? Unexpected turn (Evolutionary Game Theory) Nash equilibrium idea can be applied even when there is no any reasoning but as a result of “natural selection” of different behavior hence genes determine fitness in a given environment more fitted organism produces more offsprings, hence leaves more “successful” genes in the population Question: Why, given evolutionary pressure, do different types of behavior co-exist in the world? Hawk Dove Hawk (−1; −1)(10; 0) Dove (0; 10)(5; 5) Bounded Rationality Lecture 5 Evolutionary Argument Evolutionary Argument Evolutionary Stable Strategy Perspective of a biologist organism’s genes determine its observable characteristics more fitted organism produces more offsprings, hence leaves more “successful” genes in the population Question: Why, given evolutionary pressure, do different types of behavior co-exist in the world? Hawk Dove Hawk (−1; −1)(10; 0) Dove (0; 10)(5; 5) Bounded Rationality Lecture 5 Evolutionary Argument Evolutionary Argument Evolutionary Stable Strategy Perspective of a biologist organism’s genes determine its observable characteristics hence genes determine fitness in a given environment Question: Why, given evolutionary pressure, do different types of behavior co-exist in the world? Hawk Dove Hawk (−1; −1)(10; 0) Dove (0; 10)(5; 5) Bounded Rationality Lecture 5 Evolutionary Argument Evolutionary Argument Evolutionary Stable Strategy Perspective of a biologist organism’s genes determine its observable characteristics hence genes determine fitness in a given environment more fitted organism produces more offsprings, hence leaves more “successful” genes in the population Hawk Dove Hawk (−1; −1)(10; 0) Dove (0; 10)(5; 5) Bounded Rationality Lecture 5 Evolutionary Argument Evolutionary Argument Evolutionary Stable Strategy Perspective of a biologist organism’s genes determine its observable characteristics hence genes determine fitness in a given environment more fitted organism produces more offsprings, hence leaves more “successful” genes in the population Question: Why, given evolutionary pressure, do different types of behavior co-exist in the world? Bounded Rationality Lecture 5 Evolutionary Argument Evolutionary Argument Evolutionary Stable Strategy Perspective of a biologist organism’s genes determine its observable characteristics hence genes determine fitness in a given environment more fitted organism produces more offsprings, hence leaves more “successful” genes in the population Question: Why, given evolutionary pressure, do different types of behavior co-exist in the world? Hawk Dove Hawk (−1; −1)(10; 0) Dove (0; 10)(5; 5) Each animal, from a large population, is programmed to “play” a strategy There is a random matching between animals over their lifespan, when they “play the game” More successful animals (with higher average fitness) have more offsprings, which are programmed to inherit strategy Story in biology is very different: Bounded Rationality Lecture 5 Evolutionary Argument Evolutionary Argument Evolutionary Stable Strategy Biology vs. Economics Analogy between biology and game theory: characteristics of the organism strategy fitness of the organism payoff ??? Nash Equilibrium There is a random matching between animals over their lifespan, when they “play the game” More successful animals (with higher average fitness) have more offsprings, which are programmed to inherit strategy Bounded Rationality Lecture 5 Evolutionary Argument Evolutionary Argument Evolutionary Stable Strategy Biology vs. Economics Analogy between biology and game theory: characteristics of the organism strategy fitness of the organism payoff ??? Nash Equilibrium Story in biology is very different: Each animal, from a large population, is programmed to “play” a strategy More successful animals (with higher average fitness) have more offsprings, which are programmed to inherit strategy Bounded Rationality Lecture 5 Evolutionary Argument Evolutionary Argument Evolutionary Stable Strategy Biology vs. Economics Analogy between biology and game theory: characteristics of the organism strategy fitness of the organism payoff ??? Nash Equilibrium Story in biology is very different: Each animal, from a large population, is programmed to “play” a strategy There is a random matching between animals over their lifespan, when they “play the game” Bounded Rationality Lecture 5 Evolutionary Argument Evolutionary Argument Evolutionary Stable Strategy Biology vs. Economics Analogy between biology and game theory: characteristics of the organism strategy fitness of the organism payoff ??? Nash Equilibrium Story in biology is very different: Each animal, from a large population, is programmed to “play” a strategy There is a random matching between animals over their lifespan, when they “play the game” More successful animals (with higher average fitness) have more offsprings, which are programmed to inherit strategy Strategy p is Evolutionary Stable Strategy if when the whole population uses this strategy, any small group of invaders (mutants) with strategy q will eventually die off πq; (1 − ")p + "q < πp; (1 − ")p + "q for " > 0 Check whether D is the ESS. Check whether C is the ESS. In particular, it means that strategy p performs well against itself, i.e., π(q; p) ≤ π(p; p) and p is NE (but the converse is not true!) Bounded Rationality Lecture 5 Evolutionary Argument Evolutionary Argument Evolutionary Stable Strategy Evolutionary Stable Strategies DC D (15; 15)( 24; 0) C (0; 24)(22; 22) πq; (1 − ")p + "q < πp; (1 − ")p + "q for " > 0 Check whether D is the ESS. Check whether C is the ESS. In particular, it means that strategy p performs well against itself, i.e., π(q; p) ≤ π(p; p) and p is NE (but the converse is not true!) Bounded Rationality Lecture 5 Evolutionary Argument Evolutionary Argument Evolutionary Stable Strategy Evolutionary Stable Strategies DC D (15; 15)( 24; 0) C (0; 24)(22; 22) Strategy p is Evolutionary Stable Strategy if when the whole population uses this strategy, any small group of invaders (mutants) with strategy q will eventually die off Check whether D is the ESS. Check whether C is the ESS. In particular, it means that strategy p performs well against itself, i.e., π(q; p) ≤ π(p; p) and p is NE (but the converse is not true!) Bounded Rationality Lecture 5 Evolutionary Argument Evolutionary Argument Evolutionary Stable Strategy Evolutionary Stable Strategies DC D (15; 15)( 24; 0) C (0; 24)(22; 22) Strategy p is Evolutionary Stable Strategy if when the whole population uses this strategy, any small group of invaders (mutants) with strategy q will eventually die off πq; (1 − ")p + "q < πp; (1 − ")p + "q for " > 0 In particular, it means that strategy p performs well against itself, i.e., π(q; p) ≤ π(p; p) and p is NE (but the converse is not true!) Bounded Rationality Lecture 5 Evolutionary Argument Evolutionary Argument Evolutionary Stable Strategy Evolutionary Stable Strategies DC D (15; 15)( 24; 0) C (0; 24)(22; 22) Strategy p is Evolutionary Stable Strategy if when the whole population uses this strategy, any small group of