Monday, 16 April 2012

Economics 101 - Hunger Games Style

Following the release of the blockbuster film Hunger Games, there has been a lot of discussion surrounding the various physiological discourses underlying the plot, with some articles going as far to say it is the new Lord Of The Flies. However, what really stood out for me was the ability of this film to portray economic theory in a stab, shoot and break neck kind of way - forget the new Lord Of The Flies, this film will be replacing economics 101 at a college near you.

So in the absence of having an economist drooling with excitement and telling you about the connections on the way home from the cinema, consider the following no-drool analogy. By the way, bit of a spoiler alert so flick to a new article if you want to read the novel or see the movie first.

Lets start with the basics. Economics is built around the homoeconomus or the ‘rational man’. This guy, used within economic models, is assumed to be selfish and only concerned about achieving the maximum payoff for himself. The way in which this payoff is achieved however, depends on individual preferences and incentives.

When the tributes from the districts are elevated up the tube into the arena, the ultimate payoff is life, which immediately encourages various strategies based on the players’ preferences and incentives at that point of the game. I will break this part of the analogy down into two groups of players (fighters and runners) because about 1 years worth of economic theory happens within the first 60 seconds of the game.

Firstly, why do at least half the players run into the middle where the weapons are positioned? Pure economic models would argue that the strategy adopted by these tributes yields smaller opportunity costs, meaning the benefits of adopting another strategy such as running is less than the benefits of immediate battle.

Subsequently, the scramble for weapons results in a sub game within the greater Hunger Games. Depending on the numbers and available information, players with a typical game may be able to anticipate the moves of other players and base their future moves on the forecasted movements of the opponents. This is known as game theory.

But in this sub-game, there is a lack of information about the positioning of the weapons and the number of players that would make the scramble. As a result, players experience a condition known within economics as bounded rationality. This influences players to adopt sub-optimum strategies that ultimately lead to many deaths.  

An alternative explanation for this blood bath can be offered by behavioral economics. Assume the tributes knew that they did not have enough information at the start of the game to adopt an optimum strategy within this sub-game. Why then did they not consider this and adopt the run and hide strategy? Put simply, their probability was distorted by any number of behavioral traits or heuristics that led them to put more value on wining the first battle. This is known as prospect theory.

Now lets consider the runners. The first reason for running is simply justified - the payoff for hiding and surviving is greater for those players than an initial battle. As for Katniss, she obtained information from her mentor, Haymitch, to not run into the battle because it would result in a blood bath. Presumably the other contestants that ran into battle had not received the same advice. This situation is known as information asymmetry and is advantageous to the party that is privy to the advice because they are able to adopt an optimum strategy. In this case Katniss ran into the woods and survived the first part of the match.

The second section of the film sees the ‘Careers’ colluding. This gives the group a strategic advantage over individual players and effectively allowed them to systematically eliminate individual tributes.  Meanwhile it allowed them to secure the weapons cache and food provisions. Although it does not directly achieve the overall award of life, it improves the probability of winning.

This reflects typical oligopoly behavior whereby the incumbent cartel will collude to remove smaller firms. But as we see towards the end of the film, there is an incentive to cheat within the cartel and achieve the overall win.

Stepping outside the battle arena, there are a number of interesting parallels between these fictional groups and stakeholders within a real market. Sponsors within the movie reflect the actions of an investor. Like a typical investor, they base value on the future payoff of the asset which is assessed by watching the tributes train. Furthermore, like a typical investor that will back a winning stock, sponsors can distribute resources to tributes during the match who they believe will win.

At the top of the food chain lies the Gamemaker that plays a similar role to government. The issue with any government is that they have exterior motives; subsequently their actions can distort the incentives of market participants. This behavior is portrayed in the film when the Gamemaker tries to remove Katniss from the game through an epic bush fire and the changing of rules from one winner, to two winners if tributes belong to the same district and finally back to one winner once Kantiss and Peeta are the final two standing.

As you know, they both choose death by poison berries, but the Gamemaker concedes because of fears of a wider uprising within the districts and lets them both live. Synchronised and strategic action such as this often has the ability to change government policy. A few examples include interest rate movements from the big four banks that do not align with the RBA, or the collective illegal behavior of banks that forced the revoking of the Glass Stegal Act in the USA.

But this part also has a deeper meaning to it; that individuals can be altruistic and should not believe everything or blindly follow incentives. Paradoxically, Katniss and Peeta do not represent the selfish ‘rational man’, yet I am sure the selfless act to go down together rather then kill one another seemed completely rational to the audience. Weirdly and some what conveniently, this portrays the paradox of rationality within economics.

And that concludes economics 101 - Hunger Games style.

1 comment:

  1. I had never considered Hunger Games from an economic perspective - you're so clever ♥