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Professor Roger Lagunoff Examines the Strategic Behavior Behind Economics

Professor Lagunoff is a professor of economics at Georgetown. (Photo: Claire Callagy)



By Kara Burritt
Roger Lagunoff knows that understanding how people behave can lead to profitable predictions.
A professor of economics at Georgetown, Lagunoff analyzes behavioral trends using game theory-based models. Game theory, which mathematically represents the strategic interaction of individuals in situations where they have knowledge of each other’s actions and of future consequences, is an appropriate tool for exploring problems of economics.
“Consider the negotiations between a buyer and seller,” explains Lagunoff. “Neither one knows how much the other is willing to compromise. Take the seller, for instance. If the seller demands too high a price, he risks losing the sale. If his asking price is too low, he lowers his profits. In fact, if the seller makes any offer he reveals some previously hidden information about himself, which the buyer can then use to the buyer's advantage. What should the seller do? This is a classic game theoretic problem.”
Lagunoff focuses his research on dynamic games, a term for situations that arise again and again. Each time, the circumstances evolve as participants look ahead in some way to the future effects of their present-day decisions and act accordingly. For example, what is the optimal price for a seller to ask of a buyer to preclude negotiation? While Lagunoff does not himself usually calculate the mathematical models to answer such a question, he utilizes the empirical work of other economists to develop the theories to explain such behavior.
Lagunoff discovered his penchant for research as an undergraduate economics student at Ohio State University while working as a research assistant at the Journal of Money, Credit and Banking. His interest in teaching came later, when he served as a graduate teaching assistant at the University of Minnesota. Lagunoff brought these vocations to Georgetown in 1996, and has since contributed significantly to both the undergraduate and graduate programs.
Lagunoff’s own research has tended to reach beyond financial markets into the developing field of political economy. Political economy explores the economic theories that are at work in the public sector where the focus becomes government strategy rather than consumer behavior. At the forefront of emerging research in this field, Lagunoff and fellow Georgetown economics professor Jinhui Bai are working on a paper to analyze the interplay of governmental power and public policy. Their work considers the dilemma of political leaders weighing policy changes that affect not only the present state of affairs but also their own future hold on power, and influence upon the greater political landscape.
Lagunoff and Bai propose that a political leader wishing to both preserve his hold on power and have continued influence upon future policy decisions is constrained by “Faustian tradeoffs.” The term references the fictional character Faust, who bargained with the devil for omniscience on earth at the expense of his eternal soul. In making such decisions, a political leader may face two options: selecting a good but unpopular path, thus risking the loss of power and the future opportunity to shape policy; or selecting a less advantageous popular option, thus preserving future political power, but failing to ultimately resolve the dilemma at hand. In either case, something is gained at the expense of something else more enduring. Lagunoff and Bai utilize game theory models to examine how awareness of this tradeoff impacts political leaders’ strategic decision-making.
“One of the main things to come out of this research is an understanding of the degree to which policy makers, recognizing that their policies today…affect future distribution of power tomorrow, actually temper their choices,” explained Lagunoff. This tempering is labeled “the Burkean effect,” after conservative statesman Edmund Burke, because it constrains the extremes to which policy makers are willing to go.
Lagunoff emphasizes that the models in his and Bai’s paper do not directly translate to real life. Their mathematical constructs are subject to many limitations, and thus serve only as a general theoretical model of how political leaders might temper their policy choices when considering the long-term consequences on political power.
“We generate examples that we hope have some degree of realism, some essential criteria that you can extract from these real world episodes, and try to model them as precisely as we can using traditional game theoretic language,” Lagunoff said.
Such examples range from private market to public sector trends, yet also include interpersonal situations throughout many strata of society. Lagunoff is currently revising a paper—with co-authors Luca Anderlini of Georgetown’s Department of Economics, and Dino Gerardi of Yale University’s Department of Economics—that considers how a society’s inherited memory of past conflict can affect the degree of destructiveness in present-day war. The co-authors also previously explored how passed information is utilized within diversified organizations made up of multiple decision-makers. In another article, co-authored with Matthew Haag of the University of Warwick, Lagunoff theorized how internal group cooperation varies with group size and heterogeneity.
The questions Lagunoff poses and explores throughout his research focuses upon the same essential idea: “Individuals making strategic decisions and thinking about future consequences and how other individuals are going to react strategically to their decisions,” said Lagunoff, “That’s a game theoretic problem.”
Although Lagunoff’s research has yielded important conclusions in the study of economics and human interaction, he is careful to emphasize that his work is theoretical and subject to challenges from his academic peers. Yet, with enough models reaching a common conclusion, such research can provide valid insights into human behavior.
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