Chapter 9 - Interdependence, Decision Making and Theory of Games

Chapter 9 - Interdependence, Decision Making and Theory of Games

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Interdependence, Decision Making, Theory of Games – Principles of Economics (Ch.9) 05/11/10 History: Theory of Games and Economics Behaviour: written by John von Neumann and Oskar Morgenstern and published in 1944 Nash Equilibrium: established by John Nash in the 1950s (equilibrium in game: an outcome that is stable and predictable given the motives of and constraints facing the players) The Theory of Games: Your Payoff from a given move depends on what you opponent does in response. Basic Elements of a game: o The players o The list of possible actions or strategies o The payoffs Payoff matrix: a table that describes the payoffs in a game for each possible combination of strategies. Dominant Strategy : one that yields a higher payoff no matter what your opponent in a game chooses. o a dominant strategy can lead to lower payoffs in comparison with no action at all (prisoners dilemma) Dominated Strategy : any other strategy available to a player who has a dominant strategy. o One that leads to a lower payoff than an alternative choice (dominant strategy) regardless of the other player´s choice
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