Sandy wants me to blog about the Ambani settlement. Actually, I found their fight more interesting than their settlement. Apparently, in his lifetime père Ambani had set up things his estate in such a way that Mukesh had controlling stake in all companies. So legally speaking, he could have chucked out Anil from all boards of all companies and Anil couldn’t have done jack about it. (i.e. he would still be a shareholder and get dividends, but he wouldn’t get any say in running the companies.) If my understanding is correct (I am not sure) then Anil’s behaviour makes a lot of sense. In fact it reminds me of this puzzle I had posted sometime back – the one about pirates. I find it interesting that most people understand Anil Ambani’s actions pretty well, but couldn’t really appreciate the problem of the pirates.
There is a simple game which explains the problem. Suppose there are 100 gold coins, out of which I am supposed to offer you something. What I offer is entirely up to me, but if you do not accept my offer, neither of us gets any part of the stash. What should I offer?
Economists say that I should offer the lowest I can, i.e. 1 coin, because it makes sense for you to accept it. The alternative is that you don’t get anything. They call this “rational” and if you deviate from this behaviour, they call it “non-rational” and they spend a lot of time studying this behaviour, wondering why you do it.
In fact, most of you will not accept 1 coin and you don’t care whether you are rational or not. And I know that you won’t, so I won’t make that ridiculous offer. I will offer something higher. But if your behaviour got you a higher amount than your “rational” behaviour would have, how on earth is your actual behaviour non-rational?
So “rationality” turns out to be much more complex than economists traditionally thought it was. But non-economist humans have no problem whatsoever negotiating this complexity. In real life situations, I would have a fairly good idea how much I need to offer you. The exact answer will depend on our bargaining powers, negotiating skills, customs and traditions, power balance between us and other things.
So in theory, Mukesh could have offered whatever he wanted to Anil and gotten away with it. In theory, Anil could not have done anything about it. But in practice, Anil had the power to cause significant harm to Reliance by making damaging statements, getting the government involved and by filing lawsuits. How much he got depended on how much damage he was willing to do to what was ultimately his inheritance.
I find your statement about economists and their theories of rational behaviour so odd, that I don’t believe it.
If economists are so mathematical in their analysis of society, of what good could their theories be?
Yup…that’s almost exactly why Anil made a hue and cry. He’s smarter than he looks…..that’s for sure 🙂
And nice to see you blogging again.
Hi Ravikiran
Don’t you think economists haven’t figured this out yet? We’re not stupid at all. This is an objection made about non-cooperative game theory from the beginning.
The issue is somewhat different if you are talking about companies or if you are talking about people. People will gladly pay a coin to thwart another if they don’t like him. Companies have to act rationally, because they cannot just throw money away to spite someone else.
When you are talking about people, you need to consider ethics in game theory. People either act ethically (ethics have to be defined before you play the game, but we know intuitively what would mean in most cases), or else people will not cooperate with you. In the pirates problem, either pirate 1 gives 20,20,20,20,20 or he is a dead man for sure. Even pirates have ethics, by the way. You start slitting thoats and you know where you’ll end up pretty soon.
Michael, I am not an economist, but I am aware of game theory and other stuff. I know that these things are almost 40 years old now, so the accusation that economists have been ignoring them doesn’t hold water.
The real question then is to what extent the predictions of classical economics need to be modifed to accomodate the results of the new research. My feeling is, not much. Their broad predictions remain valid.