Economics 101, UCLA
Lectures 2 and 3, 9/30/10. Sequential Rationality and introduction to Game Theory: se-
quential games and simultaneous games.
Alan was well settled in California. After meeting Squitty, whom he found to be
a rather odd character, and after having lost all his money to the oddness of that same
character, and still after having endured some yelling from No1 to this regard, he had
accustomed himself to the local lifestyle quite well. So well that on that Friday afternoon
he started wondering whether on Saturday he would prefer relaxing at home, skiing in
Mammoth, or surﬁng in San Diego. Given that he was by now fully rational that didn’t
seem like much of a challenge. So he started pondering:“Well, I could drive down to San
Diego, and then, if I want to surf, that should be just perfect. Oh, but if I then want to
relax at home, then, ehm.
.., let me think about this.
.. I got it - I should not drive to San
Diego so that if I want to relax at home I can do that; wait, but what about if I want to
So he quickly gave up and called up Bob, explaining him the problem. Bob grudg-
ingly listened, until he ﬁnally lost his patience: “That’s a tough problem, DUDE! It’s a
simple world! Just decide what you want tomorrow; After you decide, drive yourself to the
appropriate place, and everything should be just ﬁne. You hear me?!”
After Bob hung up on him, Alan thought again. He realized that it was all to his
advantage: the fact that he, Alan, was so monotonous in his moods and aspirations, that
his life was so boringly stable, and that even the weather never seemed to change. All that
meant that Bob was right. He just had to ﬁgure out what he would like doing the next day,
and then make the appropriate choice today. Since he was now rational and his preference
so stable that it would not change, he would just have to ask himself the question of what
he would like to do most on Saturday, and then
from there. Indeed, doing
anything else would not seem rational, for instance, driving to San Diego, and then ﬁguring
that he in fact wanted to relax would be somewhat costly, to say the least.
.. “Alan, you are
such a clever man with the perfect plan.” He smiled to himself. He was sequentially rational.