Group 4: Game Theory and Adam Smith

In his book, Game Theory Evolving, Herbert Gintis illustrates the importance of game theory, believing it helps us “ understand the stunning interplay of cooperation and conflict that accounts for the strengths (and weaknesses) of the market economy and our strengths (and weaknesses) as a species” (xxii). By developing mathematical models, game theory predicts outcomes of human interactions. Adam Smith’s theories of human behavior, described in his Theory of Moral Sentiments, can be confirmed with game theoretic models, which justify sympathy as a dominate human trait and explain how altruism can serve one’s self interest.

Utlitiy functions

Adam Smith uses TMS to elaborate on the altruistic behavior inherent in human nature. He begins by stating, “How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it”(I.I.1). Game theorists have adopted this; In his book, Nuts and Bolts for the Social Sciences, Jon Elster states, “Sometimes we take account of other people’s success and well-being and are willing to sacrifice some of our own for their sake” (52). In their article, “Modeling Strong Reciprocity,” Armin Falk and Urs Fischbacher use this concept to construct a utility function that includes not only an individual’s monetary payoffs, but the other players’ payoffs as well:

The Samartian’s Dilemma

Herbert Ginitis uses utility function models to show how altruistic behavior among family members improves saving habits; “James Buchanan (1975) has made the insightful point that even if people are perfectly capable of managing their retirement savings, if we are altruistic towards others, we will force people to save more than they otherwise would” (33-34). Ginitis’s model is very similar to Falk’s and Fischbacher’s, except Ginitis chooses family members as players. It is clear that Smith believed the strongest forms of altruism are between family members:

After himself, the members of his own family, those who usually live in the same house with him, his parents, his children, his brothers and sisters, are naturally the objects of his warmest affections. They are naturally and usually the persons upon whose happiness or misery his conduct must have the greatest influence. He is more habituated to sympathize with them. He knows better how every thing is likely to affect them, and his sympathy with them is more precise and determinate, than it can be with the greater part of other people.(VI.II.5)