Chapter 20 - Game theory, strategic decision making, and behavioral economics. After reading this chapter, you should be able to: Explain what game theory is and give an example of a game and a solution to a game, discuss how strategic reasoning and backward induction are used in solving games, distinguish informal game theory differs from formal game theory, describe how the results of game theory experiments challenge some standard economic assumptions. | Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 1 Chapter Goals Explain what game theory is and give an example of a game and a solution to a game Distinguish how informal game theory differs from formal game theory Explain strategic reasoning and backward induction used in solving games Describe how the results of game theory experiments challenge some standard economic assumptions 2 Game Theory and the Economic Way of Thinking Game theory is a very flexible tool that allows us to develop more precise models of situations that involve strategic interactions Game theory models are more flexible than the standard economic models Game theory is formal economic reasoning applied to situations in which decisions are interdependent Game theory is a framework to use in understanding real-world events 3 The Game Theory Framework They tell the professor that the reason they missed the exam was that they were all in a car that had a flat tire The professor lets them make up the exam Four “A” students partied the night before an exam and slept through the exam The exam had two questions, an essay relating to the material and a screening question which tire? A screening question is a question structured in such a way as to reveal strategic information about the person who answers 4 The Prisoner's Dilemma There is a payoff matrix which is a table that shows the outcome of every choice by every player, given the possible choices of all other players The payoff matrix has three elements: Players Strategies Payoffs The prisoner’s dilemma is a well-known two-person game that demonstrates the difficulty of cooperative behavior in certain circumstances 5 Dominant Strategies and Nash Equilibrium A Nash equilibrium is a set of strategies for each player in the game in which no player can improve his or her payoff by changing strategy unilaterally A dominant strategy is a strategy that is preferred by a player regardless of the opponent’s . | Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 1 Chapter Goals Explain what game theory is and give an example of a game and a solution to a game Distinguish how informal game theory differs from formal game theory Explain strategic reasoning and backward induction used in solving games Describe how the results of game theory experiments challenge some standard economic assumptions 2 Game Theory and the Economic Way of Thinking Game theory is a very flexible tool that allows us to develop more precise models of situations that involve strategic interactions Game theory models are more flexible than the standard economic models Game theory is formal economic reasoning applied to situations in which decisions are interdependent Game theory is a framework to use in understanding real-world events 3 The Game Theory Framework They tell the professor that the reason they missed the exam was that they were all in a car that had a flat tire The .
