An insurer working for Floyd’s is trying to assess the value of cargo lost in a ship that sank during a storm and was full of barrels of wine (all of the same variety and vintage). The year is 1583, the cargo valuation paperwork was eaten by rats, but only two merchants had goods on the ship and each owned half the barrels. The insurer’s instructions are that he can compensate each merchant for up to 1000 pounds (guineas) for his whole cargo but can only rely on the merchants’ self-valuation. The insurer puts each merchant in different rooms at the same time and asks them to write down their personal value assessment, at a maximum of 1000 and a minimum of 50 pounds. If their assessments agree, each will receive that amount. If they disagree, the lower valuation amount is taken as basis. The merchant with the lower valuation receives the basis plus 50 pounds (up to the maximum) and the merchant with the higher valuation receives the basis minus 50 pounds. What is the Nash equilibrium of the game? Explain the solution and comment on the outcome and how it relates to rationality and human behavior.

Answer rating: 100% (QA)

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