Module 1 - Investopedia Flashcards
What is game theory?
It is the study of how and why players make decisions about their circumstances.
Why do people study game theory?
The intention of game theory is to produce optimal decision-making of independent and competing actors in a strategic setting.
How do people use game theory?
Using game theory, real-world scenarios for such situations as pricing competition and product releases (and many more) can be laid out and their outcomes predicted.
When do we use game theory?
Any time a situation with two or more players involves known payouts or quantifiable consequences, we can use game theory to help determine the most likely outcomes.
What are the applications of game theory? Where would we use it?
Game theory has a wide range of applications, including psychology, evolutionary biology, war, politics, economics, and business.
What do we assume when studying game theory?
According to game theory, the actions and choices of all the participants affect the outcome of each. It’s assumed players within the game are rational and will strive to maximize their payoffs in the game.
In game theory, what do we mean by “game”?
Any set of circumstances that has a result dependent on the actions of two or more decision-makers (players)
In game theory, what do we mean by “players”?
A strategic decision-maker within the context of the game.
In game theory, what do we mean by “strategy”?
A complete plan of action a player will take given the set of circumstances that might arise within the game.
In game theory, what do we mean by “payoff”?
The payout a player receives from arriving at a particular outcome. The payout can be in any quantifiable form, from dollars to utility
In game theory, what do we mean by “information set”?
The information available at a given point in the game. The term “information set” is most usually applied when the game has a sequential component.
In game theory, what do we mean by “equilibrium”?
The point in a game where both players have made their decisions and an outcome is reached.
What is the Nash Equilibrium?
is an outcome reached that, once achieved, means no player can increase payoff by changing decisions unilaterally.
It can also be thought of as a “no regrets” outcome in the sense that once a decision is made, the player will have no regrets about it, considering the consequences.
How many Nash Equilibriums can be reached in each game?
Generally, there can be more than one equilibrium in a game. However, this usually occurs in games with more complex elements than two choices by two players.
How do economists use game theory?
Economists often use game theory to explain oligopoly firm behavior. It helps to predict likely outcomes when firms engage in certain behaviors, such as price-fixing and collusion.
How do businesses use game theory?
In business, game theory is beneficial for modeling competing behaviors between economic agents.
What is a game tree?
A company may start in position one and must decide on two outcomes. However, there are continually other decisions to be made; the final payoff amount is not known until the final decision has been processed.
How does project management use game theory?
Project management involves social aspects of game theory, as different participants may have different influences.
For example, a project manager may be motivated to successfully complete a building development project.
Meanwhile, the construction worker may be motivated to work slower for safety or to delay the project to add more billable hours.
How is game theory used in consumer product pricing?
The strategy of Black Friday shopping is at the heart of game theory. The concept holds that should companies reduce prices, more consumers will buy more goods.
A balance must be found. Price a good too low and it won’t reap profit. Price a good too high and it might push customers toward a substitute.
What is cooperative game theory?
Cooperative game theory deals with how coalitions, or cooperative groups, interact when only the payoffs are known.
It is a game between coalitions of players rather than between individuals, and it questions how groups form and how they allocate the payoff among players.
What is non-cooperative game theory?
Non-cooperative game theory deals with how rational economic agents deal with each other to achieve their own goals.
The most common non-cooperative game is the strategic game, in which only the available strategies and the outcomes that result from a combination of choices are listed.
A simplistic example of a real-world non-cooperative game is rock-paper-scissors.
What is a zero-sum game?
When there is a direct conflict between multiple parties striving for the same outcome,
for every winner, there is a loser.
the collective net benefit received is equal to the collective net benefit lost
What is a non-zero-sum game?
is one in which all participants can win or lose at the same time.
Consider business partnerships that are mutually beneficial and foster value for both entities. Instead of competing and attempting to win at the expense of the other, both parties benefit.
What is a simultaneous move game?
Simultaneous move situations, which occur frequently in life, mean each participant must continually make decisions at the same time that their opponent is making decisions.
What is a sequential move game?
In some cases, there is an intentional staggering of decision-making steps, enabling one party to see the other party’s moves before making their own.
This is usually present in negotiations; one party lists their demands, then the other party has a designated amount of time to respond and list their own.
What is a one-shot game?
Like much of life, the underlying competition starts, progresses, ends, and cannot be redone.
This is often the case with equity traders, who must wisely choose their entry point and exit point, as their decision may not easily be undone or retried.
What is a repeated game?
some repeated games continue on and seemingly never end.
These types of games often contain the same participants each time, and each party has the knowledge of what occurred previously.
What is the Nash Equilibrium in Prisoner’s dilemma?
The Nash equilibrium suggests that in a prisoner’s dilemma, both players will make the move that is best for them individually but worse for them collectively.
What is the optimal strategy in the prisoner’s dilemma also called?
Tit-for-Tat
if provoked, a player subsequently responds with retaliation; if unprovoked, the player cooperates.
What is a dictator game?
a simple game in which Player A must decide how to split a cash prize with Player B, who has no input into Player A’s decision.
While this is not a game theory strategy per se, it does provide some interesting insights into people’s behavior.
Experiments reveal about 50% keep all the money to themselves, 5% split it equally, and the other 45% give the other participant a smaller share.
What is the ultimatum game?
Player A is given a set amount of money, part of which has to be given to Player B, who can accept or reject the amount given. The catch is if the second player rejects the amount offered, both A and B get nothing.
What is a volunteer’s dilemma?
someone has to undertake a chore or job for the common good. The worst possible outcome is realized if nobody volunteers.
Example - Fraud in an accounting firm. The upper management is unaware. The jr. employees know but are too afraid to say anything. If no one volunteers to report, the company will go bankrupt and everyone will lost their job.
What is meant by game theory strategy?
Game theory participants can decide between a few primary ways to play their game.
In general, each participant must decide what level of risk they are willing to take and how far they are willing to go to pursue the best possible outcome.
What is the maximax strategy?
involves no hedging.
The participant is either all in or all out; they’ll either win big or face the worst consequence.
The participant is willing to take a chance on achieving the best outcome even if the worst outcome is possible.
What is the maximin strategy?
A maximin strategy in game theory results in the participant choosing the best of the worst payoff.
The participant has decided to hedge risk and sacrifice full benefit in exchange for avoiding the worst outcome.
What is the dominant strategy?
a participant performs actions that are the best outcome for the play, irrespective of what other participants decide to do.
What is pure strategy?
a participant performs actions that are the best outcome for the play, irrespective of what other participants decide to do.
ex. rock paper scissors - the player throws out the same shape each game
What is a mixed strategy?
A mixed strategy may seem like random chance, but there is much thought that must go into devising a plan of mixing elements or actions.
What are the biggest issues with game theory?
it relies on the assumption that people are rational actors who are self-interested and utility-maximizing.
game theory often struggles to factor in human elements such as loyalty, honesty, or empathy.
cannot account for the fact that in some situations we may fall into a Nash equilibrium, and other times not, depending on the social context and who the players are.
