L18 - Game Theory

Question 1

What is Game Theory?

Answer 1

• Game theory is used by economists to highlight strategies for maximizing
  gains/minimising losses within prescribed constraints
• It helps us make predictions about how economic agents will behave in certain
  situations
• … on many occasions the predictions are correct, but sometimes they are incorrect
• Game theory has been applied to other subjects, including politics and psychology
• It’s a fantastic transferable skill that could help you in your every day life

Question 2

What are Strategic interaction referred to in Game Theory?

Answer 2

Game

Question 3

What are the decision makers called in Game Theory?

Answer 3

Players

Question 4

What are the choices called in Game Theory?

Answer 4

Strategies

Question 5

What do the best strategies rely on in Game Theory?

Answer 5

Information

Question 6

What is it referred to when player can make their decision in Game Theory?

Answer 6

• Timing

Question 7

What are the Strategies that determine how well player do called in Game Theory?

Answer 7

Payoffs

Question 8

What are the two ways of representing a Game?

Answer 8

Payoffs are wrote like this:
If A plays U & B plays L i.e. (U, L) Both receive 10
If (U, R) –>A receives 8, B receives 0

the two forms are:

• Extensive Form –> Tree Diagram
• Normal Form –> in a matrix

Question 9

What is the Dominant Strategy Equilibria?

Answer 9

• This was the first equilibrium concept used to predict the outcome of games
• a dominant strategy is where is the best payoff for that player regardless of all other players strategies
• A strategy is (strictly) dominant if:
• it provides all player with the highest payoffs, regardless of an opponent’s strategy
• we signify equilibria with a star

Question 10

What is Nash Equilibria?

Answer 10

• Sometimes players may not have dominant strategies, so there is no dominant strategy equilibrium
• John Nash introduced an alternative non-cooperative equilibrium concept in 1950
  We know it as the Nash Equilibrium concept

There is a Nash equilibrium when:
- no player can do better than their chosen strategy, given their beliefs of how other players will play

Nash equilibrium has two requirements:

(1) Each player must be playing a best response against a conjecture of how other players will play
(2) The conjectures must be correct

A game may have multiple (pure strategy) Nash equilibria or none at all

Question 11

What is Subgame Perfect Nash Equilibria?

Answer 11

• Subgame perfection is a refinement on the Nash
  equilibrium that allows us to make better predictions for sequential move games
• It requires there to be a Nash equilibrium in every “subgame”
• In a game Where A picks Up of Down and then B picks Left or right after –> there are 3 ‘subgames’
• To solve for the subgame perfect Nash equilibrium, we use “backwards induction”
• This involves starting at the end of the game to solve for best responses, then working your way back to the beginning
• Normally draw a complete of arrows on the correct branch to signify best response

Question 12

What are Sequential-move games?

Answer 12

• Where one person goes first and the other players can consider their options

Question 13

Why is Backwards induction in the the extensive form of game theory better than Nash Equilibria?

Answer 13

• it provides a better prediction than Nash because it creates a unique sub game perfect Nash equilibrium

Question 14

How can you represent simultaneous-move games in the extensive form?

Answer 14

• draw an oval shape to connect player B’s decision nodes

- It signifies that player B down not know which node he/she is at