Lecture 4 & Revision Notes Flashcards
nash equilibrium = ?
given what the other player did, i’m happy with my choice
mutual best response
prisoners dilemma = ?
when two players choose their dominant strategy that turns out to be pareto efficient
non cooperative game with no binding agreement
what is the key idea on which a solution concept is based?
equilibrium
equilibrium = ?
a state in which there’s nothing that will cause the state of the game to change
no incentive for players to deviate
what is the nash equilibrium based on?
players’ best responses
best response = ?
strategy that results in the highest payoff given the strategies of the other players
black dot = ?
player’s favoured response
circle = ?
mutual best response (nash equilibrium)
dominant strategy = ?
a player’s best reaction regardless of what the other player might do
what concept is widely used to evaluate economic outcomes?
pareto efficiency
pareto efficiency = ?
an outcome is pareto efficient if there is no other feasible outcome that is superior to it
pareto superiority = ?
an outcome that allows at least one player to be better off, without anyone being worse off
how do we know if an outcome is pareto efficient?
if there’s no point to the north-east of it on the graph
payoff dominant equilibrium = ?
occurs when there is no other equilibrium that is pareto-superior to it (e.g., 4,4 is payoff dominant equilibrium over 2,2)
limitation of pareto efficiency = ?
it doesn’t tell us whether the game is fair
many pareto efficient outcomes mean there’s a conflict of interest over which pareto efficient outcome one would prefer
assurance game = ?
a game with 2 nash equilibria
invisible hand = ?
metaphor for how self-interested individuals operate through a system of mutual interdepence
expected payoff. = ?
each payoff * the probability of it occurring
e.g., payoff 4, probability 1-P, expected payoff = 4(1-P)
risk dominant strategy = ?
the strategy resulting in the highest payoff when both probabilities = 0.5 (equal probability)
indifference probability (Pi) = ?
the point at which the players are indifferent and the expected payoffs are equal to eachother
how is indifference probability (Pi) calculated?
put the two probabilities together and solve them
what is indifference probability also known as?
tipping point
tipping point = ?
the equilibrium at which everyone’s decision changes due to the expected payoff changing once it’s reached this point
expected payoff = ?
the payoff to a strategy given the probability that the other player has for the strategy
expected payoff combines probabilities and payoffs
exacerbate = ?
make worse
credit markets = ?
markets in which one can attain a loan or incur debt
contingency = ?
payoff to the outcome of a decision is contingent if something affecting the payoff may or may not happen
sequential game = ?
game in which one moves after the other
backwards induction = ?
procedure by which a player in a sequential game chooses a strategy by anticipating the strategies the other player will deploy in response
normal form representation = ?
game shown by payoff matrix
extensive form representation = ?
game shown by game tree
can backwards induction be used to find nash equilibrium?
yes
why do people buy insurance?
to avoid taking risks
do people frequently accept unfavourable/favourable lotteries?
people frequently accept unfavourable lotteries
people frequently refuse favourable lotteries
do people act as payoff maximisers?
no
hence why they insist on choosing unfavourable lotteries
instead of maximising payoffs, what do people do?
maximise utility
utility = ?
how different outcomes make us feel
this includes how the risk involved makes us feel (e.g., at ease, anxious etc.)
what are the two classes of behaviour?
risk averse
risk netural
risk averse = ?
being willing to pay to avoid exposure to risk
risk neutral = ?
behaving as a payoff maximiser
less wealthy people tend to be…
more risk averse
due to a lack of abundance
wealthier people tend to be…
more risk neutral
due to abundance and freedom to take risk
the vicious vs virtuous cycle has what impact on society?
increases inequalities between classes
the rich get richer and the poor stay poor
what is the vicious vs virtuous cycle?
limited wealth = risk aversion = avoid risk = low returns (cycle)
substantial wealth = risk neutrality = take risks = high returns (cycle)
