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Introduction and Choice & Uncertainty ECOS3012 - Strategic Behavior School of Economics, FASS University of Sydney Lecture 1, 2 March ECOS3012 - Strategic Behavior (USYD) Introduction and Choice & Uncertainty Lecture 1, 2 March 1 / 14 Introduction Microeconomics studies aggregate implications of individual behavior of economic agents. What is needed is a mathematical theory of individual choice to provided (quantitative) predictions. The standard consumer theory is one such example of such a theory. — given preferences, a budget and prices, we can predict what the demand will be. A key ingredient in such theories is that “what the consumer choose is what she gets” — the result of any action is a certain outcome. In many environments, there is uncertainty — that is, an action may result in one of many possible outcomes. 1. Uncertainty concerns “totally random” events of nature. Think of weather, earthquakes and other such natural phenomena. 2. The outcome of an action depends on the actions of other self-interested economic agents. You are uncertain about their choices – Strategic uncertainty. ECOS3012 - Strategic Behavior (USYD) Introduction and Choice & Uncertainty Lecture 1, 2 March 2 / 14 “Game theory can be defined as the study of mathematical models of conflict and cooperation between intelligent and rational decision makers. It provides general mathematical techniques for analyzing situa- tions in which two or more individuals make decisions that influence one another’s welfare.” Roger Myerson (in “Game Theory - an analysis of conflict”) A Decision Maker is rational if her decisions are consistent with her objectives. In most models, these objectives are taken to be rationalizable with an expected utility representation A Decision Maker is intelligent if she understands the complete structure of the strategic situation, including the fact that other players are intelligent like her. ECOS3012 - Strategic Behavior (USYD) Introduction and Choice & Uncertainty Lecture 1, 2 March 3 / 14 Early Contributions to game theory Game theoretic ideas appear in many literary works (the bible, the Talmud) as well as scientific texts such as those of Charles Darwin. More formal analyses appear from the 19th century onwards Augustin Cournot’s “Researches into the Mathematical Principles of the Theory of Wealth” in 1838 studied oligopoly.
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