Chapter 11 Game Theory, Strategic Decision Making, and Behavioral Economics

Chapter 11 Game Theory, Strategic Decision Making, and Behavioral Economics

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Chapter 11: Game Theory, Strategic Decision Making, and Behavioral Economics Game theory is the formal economic reasoning applied to situations in which decisions are interdependent – has developed Screening question is a question structured in a way to reveal strategic information about the person who answers. o Example with the students of the flat tire Prisoner’s dilemma is a well known two person game that demonstrates the difficulty of cooperative behavior in certain circumstances o All plead guilty and not plead guilty – different punishments o Confessing is technically the most rational thing for each prisoner to do Payoff Matrix is a table that shows the outcome of every choice by every player, given the possible choices of all other players. Noncooperative game a game in which ever player is out for him or herself Code of silence – attributed with the mafia Cheap talk – communication that occurs before the game is played that carries no cost
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Unformatted text preview: and is backed up only by trust and not any enforceable agreement Dominant strategy is a strategy that is preferred by a player regardless of the opponents move. Nash equilibrium is a set of strategies for each player in the game in which no player can improve his or her payoff by changing strategy unilaterally Informal game theory is often called behavioral game theory because it relies on empirical observation not deductive logic alone, to determine choice s of individuals. o How people actually think Survival example complexities in human nature Vikrey auction complications in setting up the second price auction Money trust example choosing to trust the opposition in order to gain benefits for both Framing effects tendency of people base their choices on how the choice is presented....
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This note was uploaded on 02/23/2011 for the course ECON 2010 taught by Professor Moonjung during the Spring '09 term at UVA.

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Chapter 11 Game Theory, Strategic Decision Making, and Behavioral Economics

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