FM6

Question 1

What is game theory

Answer 1

mathematical study of strategic decision-making where players, with potentially conflicting interests, choose strategies to gain the best outcomes for themselves.

Question 2

Basic components of a Game

Answer 2

• Players
• Strategies
• Payoffs

Question 3

Nash Equilibrium

Answer 3

A state in which each player’s strategy is optimal given the strategies chosen by others. No player has any incentive to deviate from their strategy.

Question 4

The Prisoner’s Dilemma

Answer 4

A scenario where two players can choose to cooperate or betray each other. While mutual cooperation yields a favorable outcome for both, there’s an incentive to betray if one believes the other will cooperate.

Question 5

GT in Finance: Types of Information Asymmetry

Answer 5

Adverse Selection: Before a transaction occurs, one party has more information about a product or service’s quality.

Moral Hazard: After a transaction occurs, one party may change their behavior due to the costs of that behavior being borne by the other party.