L18 - Game Theory Flashcards

1
Q

What is Game Theory?

A
  • Game theory is used by economists to highlight strategies for maximizing
    gains/minimising losses within prescribed constraints
  • It helps us make predictions about how economic agents will behave in certain
    situations
  • … on many occasions the predictions are correct, but sometimes they are incorrect
  • Game theory has been applied to other subjects, including politics and psychology
  • It’s a fantastic transferable skill that could help you in your every day life
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2
Q

What are Strategic interaction referred to in Game Theory?

A

Game

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3
Q

What are the decision makers called in Game Theory?

A

Players

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4
Q

What are the choices called in Game Theory?

A

Strategies

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5
Q

What do the best strategies rely on in Game Theory?

A

Information

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6
Q

What is it referred to when player can make their decision in Game Theory?

A
  • Timing
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7
Q

What are the Strategies that determine how well player do called in Game Theory?

A

Payoffs

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8
Q

What are the two ways of representing a Game?

A

Payoffs are wrote like this:
If A plays U & B plays L i.e. (U, L) Both receive 10
If (U, R) –>A receives 8, B receives 0

the two forms are:

  • Extensive Form –> Tree Diagram
  • Normal Form –> in a matrix
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9
Q

What is the Dominant Strategy Equilibria?

A
  • This was the first equilibrium concept used to predict the outcome of games
  • a dominant strategy is where is the best payoff for that player regardless of all other players strategies
  • A strategy is (strictly) dominant if:
  • it provides all player with the highest payoffs, regardless of an opponent’s strategy
  • we signify equilibria with a star
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10
Q

What is Nash Equilibria?

A
  • Sometimes players may not have dominant strategies, so there is no dominant strategy equilibrium
  • John Nash introduced an alternative non-cooperative equilibrium concept in 1950
    We know it as the Nash Equilibrium concept

There is a Nash equilibrium when:
- no player can do better than their chosen strategy, given their beliefs of how other players will play

Nash equilibrium has two requirements:

(1) Each player must be playing a best response against a conjecture of how other players will play
(2) The conjectures must be correct

A game may have multiple (pure strategy) Nash equilibria or none at all

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11
Q

What is Subgame Perfect Nash Equilibria?

A
  • Subgame perfection is a refinement on the Nash
    equilibrium that allows us to make better predictions for sequential move games
  • It requires there to be a Nash equilibrium in every “subgame”
  • In a game Where A picks Up of Down and then B picks Left or right after –> there are 3 ‘subgames’
  • To solve for the subgame perfect Nash equilibrium, we use “backwards induction”
  • This involves starting at the end of the game to solve for best responses, then working your way back to the beginning
  • Normally draw a complete of arrows on the correct branch to signify best response
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12
Q

What are Sequential-move games?

A
  • Where one person goes first and the other players can consider their options
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13
Q

Why is Backwards induction in the the extensive form of game theory better than Nash Equilibria?

A
  • it provides a better prediction than Nash because it creates a unique sub game perfect Nash equilibrium
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14
Q

How can you represent simultaneous-move games in the extensive form?

A
  • draw an oval shape to connect player B’s decision nodes

- It signifies that player B down not know which node he/she is at

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