TAILIEUCHUNG - Lecture Economics: Chapter 9 - Dean Karlan, Jonathan Morduch

Chapter 9 - Game theory and strategic thinking. In this chapter you will learn: What strategic behavior is and what the components of a strategic game are, why noncooperation is a dominant strategy in the prisoners’ dilemma, how repeated play can enable cooperation,. | Chapter 9 Game Theory and Strategic Thinking © 2014 by McGraw‐Hill Education 1 What will you learn in this chapter? • What strategic behavior is and what the components of a strategic game are. • Why noncooperation is a dominant strategy in the prisoners’ dilemma. • How repeated play can enable cooperation. • How backward induction can be used to make decisions. • How first‐movers have an advantage. • How patient players have more bargaining power. • How a commitment strategy can allow players to achieve their goals by limiting their options. © 2014 by McGraw‐Hill Education 2 Games and strategic behavior • People behave rationally when they look at the trade‐offs they face and pursue their goals in the most effective way possible. • Game theory studies how people behave strategically under different circumstances. – A game refers to any situation involving at least two people that requires those involved to think strategically. – Behaving strategically involves acting to achieve a goal by anticipating the interplay between your own and others’ decisions. © 2014 by McGraw‐Hill Education 3 1 Rules, strategies, and payoffs • All games share three features: rules, strategies, and payoffs. – Rules define the actions that are allowed in a game. – Strategies are the plans of action that players follow to achieve their goals. – Payoffs are the rewards that come from particular actions. © 2014 by McGraw‐Hill Education 4 The prisoners’ dilemma The prisoners’ dilemma is a one‐time game of strategy in which two people in isolation make the choice to ‘confess’ or ‘don’t confess’ that together they committed a crime. • Payoff depends on actions of both players: You Confess Don’t confess Your accomplice Confess Don’t confess 10 years 3rd choice 10 years 3rd choice 20 years 4th choice 1 year 1st choice 2 years 2nd choice 1 year 1st choice 20 years 4th choice 2 years 2nd choice – Both confess. – One player confesses. – .

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