Reciprocity as a foundation of financial economics

This paper argues that the subsistence of the fundamental theorem of contemporary financial mathematics is the ethical concept ‘reciprocity’. The argument is based on identifying an equivalence between the contemporary, and ostensibly ‘value neutral’, Fundamental Theory of Asset Pricing with theories of mathematical probability that emerged in the seventeenth century in the context of the ethical assessment of commercial contracts in a framework of Aristotelian ethics. This observation, the main claim of the paper, is justified on the basis of results from the Ultimatum Game and is analysed within a framework of Pragmatic philosophy. The analysis leads to the explanatory hypothesis that markets are centres of communicative action with reciprocity as a rule of discourse. The purpose of the paper is to reorientate financial economics to emphasise the objectives of cooperation and social cohesion and to this end, we offer specific policy advice

Effort Perception is Made More Accurate with More Effort and When Cooperating with Slackers

Recent research on the conditions that facilitate cooperation is limited by a factor that has yet to be established: the accuracy of effort perception. Accuracy matters because the fitness of cooperative strategies depends not just on being able to perceive others' effort but to perceive their true effort. In an experiment using a novel effort-tracker methodology, we calculate the accuracy of human effort perceptions and show that accuracy is boosted by more absolute effort (regardless of relative effort) and when cooperating with a "slacker" rather than an "altruist". A formal model shows how such an effort-prober strategy is likely to be an adaptive solution because it gives would-be collaborators information on when to abort ventures that are not in their interest and opt for ones that are. This serves as a precautionary measure against systematic exploitation by extortionist strategies and a descent into uncooperativeness. As such, it is likely that humans have a bias to minimize mistakes in effort perception that would commit them to a disadvantageous effort-reward relationship. Overall we find support for the idea that humans have evolved smart effort detection systems that are made more accurate by those contexts most relevant for cooperative tasks

Influence of opinion dynamics on the evolution of games

Under certain circumstances such as lack of information or bounded rationality, human players can take decisions on which strategy to choose in a game on the basis of simple opinions. These opinions can be modified after each round by observing own or others payoff results but can be also modified after interchanging impressions with other players. In this way, the update of the strategies can become a question that goes beyond simple evolutionary rules based on fitness and become a social issue. In this work, we explore this scenario by coupling a game with an opinion dynamics model. The opinion is represented by a continuous variable that corresponds to the certainty of the agents respect to which strategy is best. The opinions transform into actions by making the selection of an strategy a stochastic event with a probability regulated by the opinion. A certain regard for the previous round payoff is included but the main update rules of the opinion are given by a model inspired in social interchanges. We find that the dynamics fixed points of the coupled model is different from those of the evolutionary game or the opinion models alone. Furthermore, new features emerge such as the resilience of the fraction of cooperators to the topology of the social interaction network or to the presence of a small fraction of extremist players.Comment: 7 pages, 5 figure

Coalition-structured governance improves cooperation to provide public goods

While the benefits of common and public goods are shared, they tend to be scarce when contributions are provided voluntarily. Failure to cooperate in the provision or preservation of these goods is fundamental to sustainability challenges, ranging from local fisheries to global climate change. In the real world, such cooperative dilemmas occur in multiple interactions with complex strategic interests and frequently without full information. We argue that voluntary cooperation enabled across overlapping coalitions (akin to polycentricity) not only facilitates a higher generation of non-excludable public goods, but it may also allow evolution toward a more cooperative, stable, and inclusive approach to governance. Contrary to any previous study, we show that these merits of multi-coalition governance are far more general than the singular examples occurring in the literature, and they are robust under diverse conditions of excludability, congestion of the non-excludable public good, and arbitrary shapes of the return-to-contribution function. We first confirm the intuition that a single coalition without enforcement and with players pursuing their self-interest without knowledge of returns to contribution is prone to cooperative failure. Next, we demonstrate that the same pessimistic model but with a multi-coalition structure of governance experiences relatively higher cooperation by enabling recognition of marginal gains of cooperation in the game at stake. In the absence of enforcement, public-goods regimes that evolve through a proliferation of voluntary cooperative forums can maintain and increase cooperation more successfully than singular, inclusive regimes.Supported by US Defense Advanced Research Projects Agency (D17AC00005), National Science Foundation grant GEO-1211972, and Fundacao para a Ciencia e Tecnologia (FCT) through grants PTDC/MAT/STA/3358/2014, PTDC/EEI-SII/5081/2014, and UID/BIA/04050/2013. P.M.H. was supported by the Walbridge Fund at the Princeton Environmental Institute