Economics defines individual rationality as consumers making choices that maximize their utility in anticipation of the future consequences of these choices. In theory, a consumer will take his or her income and allocate it towards purchases that maximize his or her utility given his or her stable of reasonably static preferences (in the short run) and estimated changes to preferences in the long run. In order for an agent to maximize his or her utility, the agent must also maximize his or her income. However, behavioural studies on human decisions in economic games (game theory) have shown that consumers do not always maximize their income. Two games in particular (Ultimatum and Centipede) have demonstrated that seemingly rational players may not maximize income, whether for perceived fairness, justice, or punishment. Practical applications of these results are observed in labour relations when striking unionized employees earn less with a labour stoppage than they would have if they had avoided losing time at work. Specifically, a seven week strike in 2008 by CUPE Local 855 (Kawartha Lakes) is examined. It is determined that all four job types in the City of Kawartha Lakes Children’s Services department lost income because of the strike. Reasoning and empirical results from both the Ultimatum and Centipede games will be used to explain the Union’s decision to strike and to strike for as long as they did
Heterogeneous Beliefs, Public Information, and Option Markets