Decision Making (6)

Question 1

What are the 2 key assumptions of Game theory?

Answer 1

2 main assumptions:

1. Common Knowledge of rules:
   - The players know the rules of the game and the payoffs and have complete information of/on the ‘game’
2. Common Knowledge of rationality:
   - The players know that the other player(s) is/are ‘rational’

Question 2

What is the Nash Equilibrium (NE)?

Answer 2

• A stable profile strategy for which the strategy of each player is their best choice - given the choices if the other player(s)
• a player deviating from an NE strategy would result in the same (weakly dominant NE) or lower payout for that player (strictly dominant strategy)

Question 3

What is the paradox of PD?

Answer 3

• The dominant strategy Nash Equilibrium, is the only non-Pareto-Optimal outcome

Question 4

What are Evolutionary Stable Strategies (ESS)?

Answer 4

Darwin’s theory of evolution is competitive:
- Natural selection
only the fittest to survive (survival of the fittest)
But cooperation is widespread in nature:
- How do phenotypes (behaviour) evolve?
- altruism (cooperation between conspecifics)
- Darwin even recognised that social insects were exceptionally cooperative and had/showed altruistic behaviour

Maynard, Smith and Price, (1974):

• Players = animals
• behaviour = strategy
• expected utility (EUT) = reproductive fitness

ESS as a(n) NE:

• Remember equilibrium must be a best response
• e.g. the strategy D ‘altruism’ must be at least as good a reply as all other strategies, H so
• E(D>=H)