1YAT: The Tipping Game

One year ago today I wrote:

I think tipping is a simple example of the problem with non-cooperative game theory. Non-cooperative game theory might do well enough to explain the behavior of firms because firms are so motivated by profits that they are not motivated by what others expect them to do. But individuals would rarely behave in the manner that non-cooperative game theory would suggest is rational behavior, because individual are programmed instinctually to cooperate. We tend to do what we are expected to do.

The tipping game is like a two-stage prisoners’ dilemma game. First the server either cooperates (good service) or not-cooperates (poor service). The customer observes the service and then either cooperates (gives a tip) or not-cooperates (gives no tip). Both would be better off cooperating than both not cooperating but the customer would have more money in his pocket if he doesn’t tip even when he receives good service. But people are hard-wired not to behave that way.

I remember receiving a nice letter about this post.