Overview of Individual & Group

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Economic theory is based on the assumption that individuals are self-interested. A person makes decisions based on the costs and benefits that he or she perceives. This group of readings explores the relationship between self-interest and the good of the group using the prisoner's dilemma, which is an example of a technique called game theory. Game theory is an analysis of interactions in which a person's outcome depends not only on his strategy of action but also on the strategies of others. Since its development in the 1940s, game theory has found important uses in many fields, including economics, political science, psychology, and biology.

Insights from the prisoner's dilemma lead to discussions of self-interest and altruism, of how cooperation can arise in a world of self-interested individuals, and of how people's actions can be coordinated.

After you complete this unit, you should be able to:

  • Explain the logic of the prisoners' dilemma.
  • Explain how Hobbes differed from Smith in his predictions of the results of actions based on self-interest.
  • Explain why the assumptions and methods of economics do not allow it to examine the inner workings of families or other small groups who know each other well, but do allow it to examine exchange and politics.
  • Distinguish between restricted and generalized altruism, and explain why economists can live with the first but not the second.
  • List the two basic ways in which self-interested decisions can be coordinated for the good of the group.

Copyright Robert Schenk