Dominique Strauss-Kahn has been arrested, taken off a plane to Paris, and accused of a shocking crime. When I hear of this kind of story, I always wonder how the “true economist” should react. After all, DSK had a very strong incentive not to commit the crime, including his desire to run for further office in France, not to mention his high IMF salary and strong network of international connections. So much to lose.Let`s try to answer the question:
Should the “real economist” conclude that DSK is less likely to be guilty than others will think?
A bad economist would think : Strauss-Kahn clearly has more to lose and thus less of an incentive to sexually assault – which makes it unlikely that he did. So he is probably innocent.
A better economist would go one step further: Strauss-Kahn realizes that we would think this way, which makes crime relatively risk-free for him. This makes it likely that he did perform the crime. So he is probably guilty.
The even better economist would go even further: Since we realize that Strauss-Kahn would realize this, and that he would want to exploit this mechanism, we can conclude that he is probably guilty.
The “real economist,” finally, would realize that this infinite loop would lead Strauss-Kahn to play his part in implementing a randomized, mixed-strategy equilibrium by throwing a dice to decide whether or not to run naked down hallways assaulting hotel staff. The economist would then write up the model, derive suitably generalized solutions for various assumptions of payoffs and attitudes towards risk, and publish it in a high ranking journal, using the Kahn-Strauss story as a motivating example in the introduction.