Game theory and emotions

The most interesting and recently controversial application of economic theory has been in the realms of Game Theory.

Game Theory was born in the inhuman brain of Johnny Von Neumann and is the branch of maths which especially suits the “dismal science” of economics.

Fundamentally it digresses from classical economic assumptions in that it sees the world where the right thing to do depends on what other people do. The point of Game Theory, like much of science and economics is to find a simplified model of the real world, or in other words a universal prescription (which became know as the Nash equilibrium – the least worse in any circumstance).

The extension of Game Theory in understanding human behaviour has aided evolutionary biologists, most famously Richard Dawkins to gain insights into the fundamental question, which as Hume put it as ‘’Why is Human nature what it is’’.

Of course this question can be best answered from an evolutionary perspective. You may know be thinking what has this got to do with economics? (and rightly so). It is a fascinating field. Let us take one example to illustrate.

Robert Frank was a classically trained economist but branched out and has written a fascinating book on why we have emotions. Indeed it was perhaps the great mind of Adam Smith who first glimpsed the future of how the bridge between biology and economics can help us better understand ourselves. His work of ‘’Theories of Moral Sentiments’’ was certainly ground breaking.

Frank beautifully explains the functions of emotions. It is amazing that a man who has written textbook in microeconomics should pick up where generations of physcologists have floundered. He says that human emotions is the stuff of economics, whether rational or material or even not.

A brief digression

The problem with socio-biology which attempts to explain human behaviour with a gene-cantered cynicism is as Robert Trivers put it “models that attempt to explain altruistic behaviour in terms of natural selection are models designed to take the altruism out of altruism”. Frank’s theory overcomes this, so now let us return.

To understand Franks’ idea of emotions it is important to note, as Matt Ridley puts it “this distinction between superficial irrationality and ultimate good sense”. In Frank’s seminal work “Passions within Reason” he begins by describing a bloody massacre by some Hatfield of some McCoys. The result of this illustration is that he shows is that emotions are profoundly irrational that cannot be explained by material self-interest (unlike the selfish gene-centred ideas which dominate much of evolutionary theory). But they have nonetheless evolved like every characteristic displayed by humans for a purpose. For whilst it seems superficially irrational for say, ants to rear their sisters than their daughters (and countless other examples!) because they are ignoring material self-interest. But penetrate beneath the surface to an organisms genes, and all becomes clear. For in the same way that the ant is serving the material self-interest of the gene, human beings who let emotions rather than rationality govern their lives may make short-term sacrifices but in the long term are making choices which govern their well-being.

Moral sentiments, as Adam Smith describes it, are, as Ridley says “problem solving devices designed to make highly social creatures effective at using social relations to their genes’ long-term advantage. They are a way of settling the conflict between short-term expediency and long-term prudence in favour of the latter”.