When information hurts

Markets, Games, and Strategic Behaviour

By Todd Kaplan

Insurance Problem

• You have a fantastic job as a professional video-game player that pays £100,000 per year.

• The group Parents against Violence of Videogames PAVLOV secretly put subliminal messages in the video game Halo2.

• These messages will cause a condition in people that have played Halo2 at the start of the year 2007.

• This will cause players to start drooling whenever they shoot people in video games.

• Such drooling is detrimental to playing the game at a world-class level.

• Fortunately, this condition is only triggered in roughly half the population that played Halo2.

Insurance Problem 2.

• Also fortunately, several expensive sessions with a renowned psychologist can cure the condition. The cure is worth it and costs £100,000. There is an insurance company that may offer you insurance for a price of £60,000.

• You have to decide on whether or not to buy the insurance if it is made available. (Assuming that you purchase the cure whether or not you have insurance.)

• At the same time, the insurance company has to decide whether or not to offer the insurance.

• The payoffs for both the company and the video game player are displayed in the following table.

Payoffs

• Payoff in utils.

• Why is the payoff to a player buying insurance 60?

Expected payoffs w/o Information

What is the expected payoffs?

What are the Nash equilibria?

With information.

• Microsoft announces that it has a downloadable program that will present a test that will tell the player for certain whether or not she/he is susceptible to the subliminal messages.

• What are the equilibria when a player knows his type?• What are the equilibria when the seller knows the

player’s type and the player doesn’t?• What are the equilibria when they both know a

player’s type? • What are the expected equilibrium payoffs?• Does the information help anyone?

Without Info results.

• Group at Exeter

With info results.

Also Exeter

Other Insurance Examples

• Examples:– Genetic testing

• Breast Cancer, etc.

– Car insurance. (I know if I am a safe driver.)– Banking (Diamond-Dybvig)/ Pensions. Bank wants to

provide steady return. Banks can keep temporary returns secret. If depositors learn state of investment is low, then they may withdraw early.

• Note problem exists if only the buyer knows, only the seller knows, both know, or simply if a test is available.

Solutions

• Ban testing. Of course there are other concerns involved knowing.

• Mandatory insurance: everyone must buy insurance and the provider must sell to everyone.