Thought Questions

Biographical Note

Colin F. Camerer (1959–)

B.A., Johns Hopkins University, 1977; M.B.A., University of Chicago, 1979; Ph.

D., University of Chicago, 1981; held faculty positions at Northwestern University,

University of Pennsylvania, University of Chicago, and California Institute of

Technology

By the age of 22, Colin Camerer had already obtained an M.B.A. specializing in finance and his Ph.D. in behavioral decision theory from the University of Chicago Graduate School of Business and began his faculty appointment at Northwestern University. He is an accomplished and renowned scholar both in behavioral theory and in experimental economic methods. He is best known for his work on decision under risk and uncertainty and behavioral game theory. Camerer is the author of the premier book on behavioral game theory, as well as scores of articles and book chapters developing the theory of behavior in games. He has also contributed to the growing field of neuroeconomics, serving as the president for the Society of Neuroeconomics from 2005 to 2006. Camerer is a Fellow of the Econometric Society and a member of the American Academy of Arts and Sciences. In addition to his academic work, Camerer has taken an interest in punk music, founding and running his own punk recording label since 1983. His label, Fever Records, produced recordings for such underground Chicago bands as Bonemen of Baruma and Big Black.

In many fields of occupation, there are regular and agreed-upon cycles to the job market. For example, because college students generally graduate in June, many employers focus their efforts for hiring entry-level positions to begin work soon thereafter. Some employers are very highly sought after for their level of pay and the future career opportunities of their employees. Consider a less-sought-after employer who has difficulty offering salaries that are similar to those commonly offered in the market. Very often, in such markets, less-sought- after employers start their process of seeking recruits earlier than their peers and make offers that expire before their competitors will make their initial offers. Such exploding offers are designed to put the recruit in a quandary. Consider a very qualified recruit with an exploding offer. He can take the offer and obtain the lower pay and a secure job with certainty. Alternatively, if he rejects the offer, he takes his chances and potentially fails to find a moredesirable job. If the salary offer is low enough, he might have a very high probability of obtaining a more-lucrative offer when the real cycle of offers begins. Nonetheless, it can be very difficult to turn down a job without another offer in hand.

People often face problems of decision under risk. In general, models of decision under risk consist of two-component models: a model of preferences over outcomes and a model of risk perception. Rational models of decision under risk depend heavily on the assumption that people understand the potential outcomes of any risky choice and the probability of each of those outcomes. In the previous chapters, we discussed several anomalies related to how people deal with probabilistic information. Behavioral models of risky choice generally base the component model of beliefs on behavior observed in experimental settings. For example, people seem to treat certainty in a very different way than probabilistic outcomes, an effect that might make exploding job offers more profitable for inferior firms. Or people may be reluctant to invest in the stock market despite higher average returns, opting for low-returning savings accounts. Interestingly, experimental observations of choice under risk sometimes contradict the common behaviors discussed in the previous chapters.

Examining the economics of decision under risk is a bit of a challenge. In a standard consumption context, we may observe whether someone chooses to purchase an apple or not. We know with relative certainty that the person understood the characteristics of either choice and we can also know with relative certainty what those characteristics are. In the context of risk, we may observe whether someone chooses to purchase a share of a particular stock, and we can observe subsequent changes in the value of that stock. However, we will never easily be

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