Week 7 Lec 14

Biology: kin selection and predation economics: bargaining and auctions politics

Strategic interactions extend the idea of utility maximization to social scenarios. Environment is strategic when decisions made by one player influences the opportunities and payoff received by the other.

Game theory describes and predicts the behaviour of interacting decision makers

Creates mathematical taxonomy of multi agent decision problems Predicts how people behave under different beliefs of what others will do

Analytical game theory describes how rational, self interested individuals should behave in strategic situations Behavioural game theory describes what people actually do and adds emotions, mistakes, limited foresight and doubts about how smart others are

Games are ways to model real world decision making scenarios Main purpose: Provide a taxonomy of strategic situations and test predictions of Game Theory

Extensive form games and normal form games

Show explicit representation of each move at each decision point Players do not make moves simultaneously Used for sequential games Time stamped decision tree (branches = actions, nodes = payoffs for all players)

Used for when players make moves simultaneously or when order of moves is irrelevant Players make decisions without seeing strategies of other players Matrix of strategies and outcomes

Game in which players either stay silent (cooperate) or snitch (defect). Dont know what their partner will do. Rational choice would be to cooperate when partner defects and vice versa

Collaboration and altruistic behaviour

Both players defect (regardless of outcome, better outcome from defecting)

Cooperation

Both players cooperating. This is because each player can improve their outcome if they change their strategy, given the other player doesn’t change theirs

Used to study social dilemmas that arise when the welfare of one group conflicts with the narrower self interest of the individual

Cold war, doping in sports, limited resources

Each player has multiple actions available Each players goal is to maximize their own utility Players make choices without observing the other players’ actions

Nash equilibria describes outcomes where no player can increase their own payoff by changing their action while keeping the other player’s actions constant

Single equilibrium: Both players choose to defect

Two equilibria: Both choose to hunt the stag or the hare (both choose to cooperate)

Sometimes people violate equilibrium theory Limitations on iterated thinking or notion of selfishness (i.e. motivation to maximize individual payoff)

Allows individual’s attitude towards social risk taking involved in coordinating on mutual trust Not limited to humans

Rationality Common knowledge Already in equilibrium

Game in which prize is awarded to competitor whose choice corresponds to the average preferences of competitors as a whole. Requires inferring opinions of general public and invest in what you think other people think is best