Game Theory

Question 1

Game theory

Answer 1

• A theoretical framework to conceive social situations among competing players and produce optimal decision-making of independent and competing actors in a strategic setting
• Shows how people will act when they make decisions simultaneously versus sequentially

Question 2

Prisoner’s Dilemma (Simultaneous Game)

Answer 2

• (in game theory) when two individuals acting in their own self-interests do not produce the optimal outcome
• The typical prisoner’s dilemma is set up in such a way that both parties choose to protect themselves at the expense of the other participant; as a result, both participants find themselves in a worse state than if they had cooperated with each other
• The Prisoner’s Dilemma is a situation where individual decision makers always have the incentive to choose in a way that creates a less than optimal outcome for the individuals as a group

Cooperate/Cooperate = 8,8
Cooperate/Cheat = 0,10
Cheat/Cooperate = 10,0
Cheat/Cheat = 1,1

Question 3

Decision Tree

Answer 3

Two individuals take turns choosing a path to go down (only two paths to choose from)

(Check study guide photo)

Question 4

Nash equilibrium

Answer 4

An individual can receive no incremental benefit from changing actions, assuming other players remain constant in their strategies. In other words, given the actions that the other party is currently doing, the selected party is doing what it most wants to do. Think of the cold war.

Question 5

Schelling point

Answer 5

A solution that people tend to choose by default in the absence of communication.

Question 6

Hoetelling theory

Answer 6

(Hotelling’s rule) posits that owners of non-renewable resources will only produce a supply of their basic commodity if it can yield more than available financial instruments

Question 7

Overton Window

Answer 7

The range of accepted ideas around the Schelling point which a politician can act within before public opinion dismisses him as a radical.