Chapter 13 · begins on page 503
Where the Mathematics Stops
The models
Each model in the book is stated on one card: who decides, when, with what information and commitment, what they get, what they may do, and the question it answers.
Model L1 · p. 527
What does an exact solution of the wrong model cost in the true game, and does the outcome reveal the error?
Model L2 · p. 529
What does a higher penalty do to violation, and what would an observer of several jurisdictions conclude?
Model L3 · p. 532
Which equilibrium does the model predict, and what does the answer depend on?
Model L4 · p. 534
Does the state have a preference to maximise, and does its internal structure change what it obtains?
Model L5 · p. 536
Can data from one regime decide which structure generated them, and so predict an intervention?
What is proved, in words
The book follows each result with one sentence that says what it means without symbols. The formal statement is a click away; the proofs are in the book.
Proposition 13.2 · The exact cost of a misspecified equilibrium · p. 527
An exact equilibrium of a game with one wrong number loses nothing against an opponent who plays by the book, loses in proportion to the error against one who exploits it, and — when the error is an over-estimate — produces exactly the outcome its own model forecast, so the outcome cannot expose it.
Proposition 13.3 · A first-order bound, and why there is no second-order cushion · p. 528
In a zero-sum game the price of solving a slightly wrong game is at most proportional to the error — and Model L1 shows that proportional, not quadratic, is what one can actually pay; a game with a strict pure saddle point pays nothing for a small error.
Proposition 13.6 · The penalty moves the enforcer, not the violator · p. 530
In a mixed equilibrium a harsher penalty does not deter: it lets the enforcer relax, and violations stay where the enforcer's own payoffs put them — while a cross-section in which harsh penalties and anxious enforcers go together shows penalties “working”.
Proposition 13.9 · Selection depends on the selector · p. 533
A game with two strict equilibria does not predict one of them: payoff dominance, risk dominance and three equally simple adjustment rules give different answers, and every dynamic answer depends on initial beliefs that the game does not contain.
Proposition 13.12 · No preference to maximise, and constraints that move the bargain · p. 535
A state composed of factions need not have a preference at all — its choice can be the agenda-setter's — and a government that must win ratification at home bargains differently abroad: a binding constraint can raise its share, and a constraint the other side cannot see makes agreements fail.
Proposition 13.15 · Same data, different worlds · p. 537
Two different worlds — an enforcer who adapts and one who follows a budget — can produce identical records; the intervention one wants to evaluate is exactly the experiment that tells them apart, so the record alone cannot rank the policies.
A parallax in history
1854–1855 · Chapter 13 · p. 512
The discriminating observation
Snow, 1854: decline after the pump handle's removal; houses compared by water company.
Chips Act support: the observed response does not identify a larger subsidy's effect (Exercise 13.1 (p. 525)).
The people
Chapter 13 · Where the Mathematics Stops
Reinhard Selten
1930 – 2016
Born in Breslau, he studied mathematics at the University of Frankfurt, where he took his master's degree in 1957 and his doctorate in mathematics in 1961, and worked for about a decade as assistant to the economist Heinz Sauermann, with whom he ran early laboratory experiments on oligopoly. After a visiting professorship at Berkeley (1967–68) he was professor at the Free University of Berlin (1969–72), at Bielefeld (1972–84) and at Bonn from 1984. In a 1965 paper on an oligopoly model with demand inertia he defined subgame perfectness, and in 1975 the refinement now called trembling-hand perfectness; with John Harsanyi he wrote a general theory of equilibrium selection. He shared the 1994 Nobel Memorial Prize in Economic Sciences with Harsanyi and John Nash.
Main works
- “Spieltheoretische Behandlung eines Oligopolmodells mit Nachfrageträgheit” (Zeitschrift für die gesamte Staatswissenschaft 121, 1965)
- “Reexamination of the perfectness concept for equilibrium points in extensive games” (International Journal of Game Theory 4, 1975)
- A General Theory of Equilibrium Selection in Games, with J. C. Harsanyi (1988)
Chapter 13 · Where the Mathematics Stops
Kenneth J. Arrow
1921 – 2017
Born in New York City, he studied at the City College of New York (B.S. in social science with a mathematics major, 1940) and at Columbia University (M.A. in mathematics, 1941), and served as a weather officer in the US Army Air Corps from 1942 to 1946. After research at the Cowles Commission in Chicago he joined Stanford in 1949, moved to Harvard in 1968, and returned to Stanford in 1979. His Columbia doctoral dissertation was Social Choice and Individual Values, with the impossibility theorem; with Gérard Debreu he proved the existence of competitive equilibrium; and he studied information as an economic variable, in medical care, insurance and learning by doing. He shared the 1972 Nobel Memorial Prize in Economic Sciences with John Hicks.
Main works
- Social Choice and Individual Values (1951; 2nd ed. 1963)
- “Existence of an equilibrium for a competitive economy”, with G. Debreu (Econometrica 22, 1954)
- “Uncertainty and the welfare economics of medical care” (American Economic Review 53, 1963)
- Essays in the Theory of Risk-Bearing (1971)
Chapter 13 · Where the Mathematics Stops
Trygve Haavelmo
1911 – 1999
Norwegian economist. He took his degree in economics at the University of Oslo in 1933 and worked as an assistant at Ragnar Frisch's Institute of Economics. In the United States from 1939 to 1947 he wrote The Probability Approach in Econometrics, his doctoral thesis, published as a supplement to Econometrica in 1944, which argued that economic theories should be formulated in probabilistic terms and estimated and tested by the methods of mathematical statistics; his 1943 article on simultaneous equations showed that estimating one relation in isolation can be highly misleading when relations are interdependent. He was professor of economics and statistics at Oslo from 1948 to 1979, and received the 1989 Nobel Memorial Prize in Economic Sciences for clarifying the probability foundations of econometrics and for his analyses of simultaneous economic structures.
Main works
- “The statistical implications of a system of simultaneous equations” (Econometrica 11, 1943)
- The Probability Approach in Econometrics (Econometrica 12, supplement, 1944)
- A Study in the Theory of Economic Evolution (1954)
- A Study in the Theory of Investment (1960)