Let me ask you this: 'What are the economics of lying?'


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The Independent Online

This is a wonderful question because the issue of deception brings out some of the best successes and the greatest flaws in economic theory – particularly game theory, the area in which lying has been studied most.

The simplest and oldest notions of 'deception' go back to the very beginnings of modern game theory. John Nash's 1950 dissertation contains a simple poker game in which agents can bluff, opening with some probability even when they have bad cards. Of course, there is nothing intrinsic in choosing to open that says "I have good cards"; it is just an action in the game.

And, in equilibrium, your opponent knows exactly what the probability is that you have a good hand when you "claim to". The reason that he can't completely disregard the claim is that you sometimes behave aggressively when you DO have a good hand. In these simple, static (one period) models of lying, the credibility of the bluff is supported by the possibility that it is not a bluff.

The more modern literature has focused on dynamic (multi-period) models, in which one can tell more elaborate stories about "building and destroying credibility". One standard approach can be illustrated by a classic model introduced by Joel Sobel in the article 'A Theory of Credibility'. There are two agents: a king and a spy. The king is unsure about the motivations of the spy, who might want to help the king or might be a double agent whose motivations are exactly opposed to those of the king. Every month, a diplomatic issue comes up with its own level of importance. The spy observes what would be best for the king and advises an action (say, A or B). After the action, the king learns whether it was the right action to take.

In equilibrium, a double agent builds credibility by giving the king good advice for a while. Then he advises the king to do the wrong thing for the king when a sufficiently important issue comes up. After that, the double agent has been outed, but has benefited in one high-stakes issue.The study of such models has become a very active area in game theory.

A final big-picture remark: in these game-theoretic models, nobody is actually being tricked. Agents have accurate beliefs about what the other side is doing (that's the definition of a Nash equilibrium) and are doing the best they can. Several innovative economic theorists at Stanford (Yossi Feinberg, Matt Jackson) have remarked that, for this reason, there isn't really a good model of lying in economics.

Ben Golub, Harvard Department of Economics; PhD in economics, Stanford


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