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25 Cards in this Set
- Front
- Back
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Game theory is formal economic reasoning applied to situations in which decisions are
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interdependent
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Game theory is a very flexible tool that allows us to develop more precise models of situations that involve
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strategic interactions.
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Game theory is a framework to use in understanding real world events:
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Examples: Evolution of institutions and behavior; politics; sociology etc.
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A Screening Question ___________
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a question structured in such a way as to reveal strategic information about the person who answers.
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Prisoner's Dilemma
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well known two person non cooperative game that demonstrates the difficulty of cooperative behavior in certain circumstances.
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Payoff Matrix
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A table that shows the outcome of every choice by every player, given the possible choices of all other players
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Payoff matrix has THREE ELEMENTS:
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Players, Strategies, payoffs
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Dominant strategy
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strategy that is preferred by a player regardless of the opponent's move
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Nash Equilibrium
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set of strategies for each player in the game in which no player can improve his or her payoff by changing strategy UNILATERALLY
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Nash Equilibrium
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doesn't have to be the solution that is jointly best for all players.
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Non-Cooperative game
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game in which each player is out for him-or herself and agreements are either not possible or not enforceable
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Cooperative games
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games in which players can form coalitions and can enforce the will of the coalition on its members
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Sequential Games
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Games where players make decisions one after another, chess, for example
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Simultaneous move games
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games where players make their decisions at the same time as other players, for example, the prison's dilemma
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Formal Game Theory Assumptions
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1) Players are fully forward looking 2) Players always behave in a manner that gives them the highest payoff 3)Players expect all other players to behave in the same manner.
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Backward Induction
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You begin with a desired outcome and then determine the decisions that could have led you to that outcome
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Dominant Strategy
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Strategy that is preferred by a player regardless of the opponent's move, prisoner's dilemma, for example
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Mixed Strategy
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strategy of choosing randomly among moves, for example ROCK PAPER SCISSORS!
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Informal Game Theory examines how...
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people actually think and behave and is, therefore, empirically based
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Standard sealed bid aution
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where the person who bids the highest gets the good
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Vickrey auctions
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sealed bid auction where the highest bidder wins but pays the price bid by the next highest bidder (result in higher bids because people are more likely to bid their willingness to pay)
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Loss Aversion is that....
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preferences are not independent of endowment (People tend to want to keep what they have regardless of their preference before acquiring the item)
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Framing Effects
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Tendency of people to base their choices on how the choice is presented (Would you choose option A of saving 200 of 600 lives or option B that will end lives of 400 of 600?)
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Behavioral economics
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examines deviations between formal game theoretical predictions and actual outcomes of games
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Traditional model remains relevant because....
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it only takes a few people to realize that money has been left on the table for the results of the standard model to hold.
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