Monday, February 28, 2011

Class 11 Take Aways

Thinking of Tomorrow

In this class, we learned about how to leverage the future to overcome social dilemmas. To be successful, a strategy must have: (1) rewards for good behavior, (2) punishment for bad behavior, and (3) forgiveness or proportionality of punishment in case of mistakes. The strength of the punishment needed depends on the size of the temptation in the present as well as the value of future rewards. Greater temptation or less future reward require greater punishment.

There are limits to sustaining cooperation and trust. When discounting of future cash flows is great or the chance that the game will continue is small then it may not be possible. The limit of when cooperation is sustainable is made by comparing rewards and punishments under a grim trigger strategy--the threat to be mean forever following any transgression.

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