Incorporating Ethical Considerations into Business Application of the

Incorporating Ethical Considerations
into Business Application of
the Game Theory-Based
Classroom Game
Sylwia E Starnawska, MBA, Ph.D.
Assistant Professor, Business Administration
School for Graduate Studies
SUNY - Empire State College
“It is indeed true that "It is not from the benevolence of the butcher,
the brewer or the baker, that we expect our dinner, but from their
regard to their own interest" (Smith, 1937, vol. I, p. ii). And just as
butcher, brewer, and baker generally act with regard to their own
interest, so too do their customers. But if, on entering the butcher's
shop as an habitual customer I find him collapsing from a heart
attack, and I merely remark 'Ah! Not in a position to sell me my
meat today, I see,' and proceed immediately to his competitor's
store to complete my purchase, I will have obviously and grossly
damaged my whole relationship to him, including my economic
relationship, although I will have done nothing contrary to the
norms of the market.
Aiasdair Maclntyre Dependent Rational Animals (1999)”
Cited after Dobson (2005)
Smith, Adam. 1937. Wealth of Nations. New York: Modem
Library (originally published in 1776).
Theoretical framework
interdisciplinary approach
• Biology: selfishness vs altruism (naïve Darwinist belief) (Dobson, 2005)
• Mathematics: Nash equilibrium
• Philosophy: Intercompany collaboration (an Aristotle’s assumption about
human nature) (Rocha & Miles, 2009), Kant’s conflict between individual and
collective rationality, utilitarian philosophy with moral rationale (White,
2009) (Gibson, 2003)
• Socio-Economics (moral reflection on dictator's game as an option for
altruism) (Cappelen, Hole, Sørensen& Tungodden, 2011)
• Sociology: fairness theories (bargaining & negotiating)
• Ethics: moral appeal, moral suasion and voluntary contribution, moral
standard, golden rule (Dal Bó & Dal Bó, 2014)
• Economics: self –interest as a driving force of market participants,
competitive or cooperative business strategies
• Business: corporate governance, corporate culture and personhood,
managerial decision making and strategic choices, the Corporate Code of
Conduct (Francés-Gómez& del Rio, 2008)
• Education: experiential learning, classroom exercise
Literature review
• The Folk Theorem for repeated games - accurate observation alone,
however costly, enables efficient cooperation in general, repeated games
(Miyagawa, Miyahara & Sekiguchi, 2008) - in the infinitely repeated
version of the game, provided players are sufficiently patient, there is a
Nash equilibrium such that both players cooperate on the equilibrium path
The Trust- Reciprocity Hypothesis - through preconceptions of other’s
expectations noticeably more reciprocity observed (Lacour, 2012)
Moral balancing - altering players preferences via self-image (Ploner &
Regner, 2013)
Trolley Problem and response – reasoning manipulation (Lanteri, Chelini &
Rizzello, 2008).
Rationality model via procedural utility incorporated into cooperative
behaviors - incentivized PD (Menestrel, 2006)
Entrepreneurship – those talented with entrepreneurial spirit are more
selfish and will not forego individual gain (Weitzel, Urbig, Desai, Sanders &
Acs, 2010).
CSR – response to social expectations via marketing decisions (Martin,
Johnson, & French, 2011)
The Lost Wallet Game – no communication, one- shot
Literature review - educational experiments
• Students who took the ethics module (1h) had
higher rates of cooperation than students
without the ethics module, as it promoted
cooperation, based on the Prisoner’s Dilemma
2x2 matrix, with two payers, played only once
with both having dominant strategy, on 154
participants (77 pairs) in Fall 2000 courses (James
& Cohen, 2004)
• Examples of the PD’s based classroom
experiments for teaching ethical decision making:
(Gibson, 2003), (Campbell, 2004)
Prisoner’s Dilemma
Prisoner B stays silent
Prisoner A stays silent
Each serves 1 year
Prisoner A: goes free
Prisoner A betrays (defects) Prisoner B: 3 years's_dilemma
Prisoner B betrays (defects)
Prisoner A: 3 years
Prisoner B: goes free
Each serves 2 years
Issues in the Game
Payoffs (fixed or random) and scenarios
Self-interest vs. altruism (or other motivations or preferences)
Options: to cooperate (compliance) or to defect (cheat)
Individual vs. collective rationality
No loyalty to each other, not betrayal, no opportunity for
retribution or reward outside the game
Dominant strategy (rational choice in decision-making)
Nash equilibrium (not Pareto efficient)
In the traditional game both players end up worse off (suboptimal outcome)
Incentive to cheat, compromise value and minimal rights
Each player has preferences among possible outcomes
Types of Games - assumptions
• Number of players: two-players, inclusion of a
third party, multiple players
• Non-cooperative game, no communication,
cost of information (perfect information) vs.
cooperative games, social interactions
• Number of repeated iterations (one-shot
game, repetition, infinite games)
• With or without dominant strategy
The experiment – description
• It was inspired by the activity recommended for the explanation
of the game theory in the Hall, R. Lieberman M. (2007)
Economics. Principles and Applications, 4th Edition, Instructor’s
Manual, Cengage Learning.
• I adopted the payoff table included in the publication (as
presented below)
• I used it in teaching of economics in the real classroom
environment to enhance the understanding of various market
structures, and implications for the firm
• The experiment was conducted repetitively in the classroom for
last 6 years (2008-2013) during the multiple sections of courses in
economics. Each semester it was possible to have one section of
the course run with the experiment of the game theory-based
classroom game preceded by the ethically-based explanation
provided to students of the non-compliance of the individual
selection of the strategy.
The experiment – how conducted
• The payoff matrix was showed to students before the play
with the explanation of the meaning and the implications of
their choices between ‘A’ and ‘B’ respectively, both as in
individual outcome and the team result.
• All students (not only the players) discussed the payoff
matrix (comparing to PD’s) recognizing interdependence and
the Nash Equilibrium
• It was played independently by 5 students selected
randomly from volunteers
• Each time it was just one round
• On the ballots, the students had to write, with the answer ‘A’
(standing for compliance), or ‘B’ (chosen as non-compliance)
remained anonymous, only the outcome was pronounced.
The experiment - samples
• Control Sample
• As above described
• Controlled experiment
• As above described
• student were instructed that
selecting ‘A’ represented the
compliance with the group and
the motivation to follow was their
ethically-based commitment to
the group and the group success.
Students were also advised that
choosing ‘B’ meant noncompliance, cheating the group,
and although not individually
penalized it was ethically
Let’s Play
• Right Now
• In a Moment
• 5 volunteers
• Consider the Payoff
• Write A or B
• Fold and return the
• 5 volunteers
• Consider the Payoff
• Write A or B
• Fold and return the
Payoff Matrix used for the classroom game
per A
per B
Payment if ALL 5 choose A
$ 4.00
Payment if 4 choose A and 1 B
$ 1.00
$ 8.00
$ 12.00
Payment if 3 choose A and 2 B
$ 0.50
$ 4.00
$ 9.50
Payment if 2 choose A and 3 B
$ 0.25
$ 0.50
$ 2.00
Payment if 1 chooses A and 4 B
$ 0.10
$ 0.25
$ 1.10
$ 0.10
$ 0.50
Payment if
ALL 5 choose B
Source: Hall, R. Lieberman M. (2007) Economics. Principles and Applications, 4th
Edition, Instructor’s Manual, Cengage Learning.
Ethical considerations:
Team effort and benefits
Common interest
Group result
Community and society
Externalities and public goods
Trust and spirit of collaboration
Omertà and Vendetta
Outcome of the experiment
– observations – before
• Students easily noticed an incentive to cheat
(defection from the agreement for the one-time
gain) leading to the sub-efficient non-cooperative
• Students recognized the similarity to the
Prisoners’ Dilemma matrix used to represent the
game theory.
• Even before the vote the discussion evolved into
the challenges of ethical behavior. Statistically
significantly different outcome in samples payoff.
Outcome of the experiment
– observations – after
• Students wanted to improve their outcome right away, although the next
round was not afforded.
• However, we discussed ‘what if’ scenarios leading naturally to the
comparison of an oligopoly and a carter.
• And again legal and ethical issues were raised as an inconvenience.
• For the hypothetical repeated game students at first, tried to stretch the
rules (redefine the ethical standards) and later however, focused on
observing others, creating mechanism for cooperation, recognizing the
value of information.
• They had limited interest in the enforcement of the agreement for the
optimal cooperative – outcome by penalties or encouragement.
• The discussion was lead to the business world application of strategic
management, competitive versus cooperative strategies (alliances),
price and marketing wars, competitive disruption and many other
applications of the game theory in business with ethical considerations
(corporate culture and corporate code of conduct).
• The ethically-based motivation introduced in the classroom game had a
significant impact on the discussion and the behavior of students.
Outcome of the experiment
– sample comparison
• The outcome of the game each time was
compared with the experiment run on the
controlling sample which was the course
section with participants not exposed to the
ethically-linked explanation of the individual
strategy of the players before the game
• Statistically significantly different outcome
(α=0.01) and higher in samples payoff and in
the number-coded answers .
Outcome of the experiment
– sample comparison
T- test: Paired Two Sample for Means, two tail at the
99% confidence level - the Null Hypothesis that
samples have the same mean (M) can be rejected
(both for payoff and for the number-coded answers)
Without instructions about ethics With instructions about ethics
n diff. in M
df Pearson Corr.
Single payoff (0.10-8.00)
1.18 0.00006 -4.26 64
Coded answers (A=1, B=0)
0.29 0.00001 -4.79 64
Market structures
Oligopoly, cartel, collusion
Price wars
Corporate strategy
Team collaboration
Social context and outcomes
Corruption, fraud, failure
Trusted leadership
Business ethics
Corporate Code of Conduct
Civic engagement
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