Sequential Moves Week 4

Question 1

Strategic foresight definition

Answer 1

An agent’s/manager’s ability to make decisions today that are rational given what is anticipated in the future (forward-thinking decision making, current choices shaped by future scenarios)

Question 2

Backward induction definition

Answer 2

Used in game theory to solve games by looking to the future, determining what strategy players will choose (anticipation), and then choosing an action that is rational, based on those beliefs

Question 3

Backward induction in sequential games

Answer 3

In sequential games, backward induction = starting with the last decisions in the sequence and then working backward to the first decisions, identifying all optimal decisions

Question 4

What characteristics determine a sequential move game?

Answer 4

A game with a sub-game Nash equilibrium
A first mover advantage

Question 5

In this sequential move battle of the sexes game - what does backward induction tell Jane to do?

Answer 5

Backward induction tells Jane to choose Tennis first

Question 6

What is a credible threat?

Answer 6

A credible threat in game theory refers to a threat made by a player that the other player believes will be carried out if a particular action is taken. For a threat to be credible, it must be rational and feasible for the player making the threat to follow through with it.

Question 7

What will Boeing do at B2 and B1?

Answer 7

Boeing will choose new plane at B1 and no plane at B2

Question 8

What will Airbus decide to do?

Answer 8

Airbus will decide the build the new plane. Boeing’s threat to supply the new plane if Airbus supplies the plane is not credible and therefore does not deter Airbus.

Airbus has a first mover advantage and take the preemptive investment choice

(Airbus used strategic foresight and backward induction to make this decision)

Question 9

What is a non-credible threat in game theory?

Answer 9

A non-credible threat is a term used in game theory and economics to describe a threat in a sequential game that a rational player would not actually carry out, because it would not be in his best interest to do so.

Question 10

What are two implications of government intervention in game theoretic prediction?

Answer 10

Implication 1: government intervention can change the outcome of transnational strategic games played by oligopolists
Implication 2: to make threats credible the payoff when they are carried out needs to be raised - some kind of costly commitment is needed (here costly for government/taxpayers)

Question 11

Is the threat of Bert blowing up the bank a credible threat?

Answer 11

No, because the payoff for him not to blow up the bank is higher at -100 than it would be if he blew up the bank (-infinity)

Question 12

What will Angela do in this game theory?

Answer 12

She will not surrender as she knows Bert wont blow up the bank (detonate) and she knows his threat is not credible

Question 13

What are Ultimatum and Centipede Games in decision-making?

Answer 13

They are abstract decision contexts where two or more players can repeatedly choose between cooperation and defection, either sharing a pot of money cooperatively or selfishly choosing a larger share for themselves.

Question 14

Should B accept this offer of pie?

Answer 14

Theory states that B should accept this offer of pie. However, in reality B may not accept this offer if they are jealous that they are only getting a small portion compared to the other person. Or if they do not like that food.

Question 15

What is the backward induction result in the Centipede Game?

Answer 15

The first player (Player A) chooses “Down” at the very first decision, ending the game immediately.

Question 16

Why does backward induction predict that the first player will end the game immediately?

Answer 16

Because each player assumes the next player will act in their own self-interest and end the game at their turn, making it rational to stop the game early.

Question 17

Why might players deviate from backward induction in real-life Centipede Games?

Answer 17

Players often cooperate longer out of trust, fairness, or the hope of mutual benefit, even though backward induction predicts early defection.

Question 18

What if there is trust between players in the centipede game?

Answer 18

A and B could be individuals or firms that maybe start by trusting each other, a little at first and with more and more at stake, building to a day when one of them must take advantage of the other or treat the other in an equitable way - the potential benefits of trust grow as the game continues.

Question 19

Experimental evidence that sometimes contradicts theory

Answer 19

In experiments players rarely choose ‘down’ in their first move.

• Some evidence states that increasing the game length from 8 to 20 decision nodes increases cooperation, but only if the game’s end is known to participants
• Experimental evidence shows that groups are more likely to end the game earlier than individuals

Question 20

What are Ultimatum Games, and how do they differ from Centipede Games?

Answer 20

In Ultimatum Games, one player proposes a division of a resource, and the other can accept or reject it. If rejected, both get nothing. This differs from Centipede Games, where cooperation can continue across multiple turns.

For example, offering a proportion of a pie

Question 21

What are “social preferences” in behavioral game theory?

Answer 21

Social preferences can lead people to act differently to what theory expects in ultimatum games and centipede games

Altruism - This means valuing another person’s benefit or happiness.
Example: If someone helps another person without expecting anything in return, they experience a positive utility (satisfaction) because the other person is better off.

Envy - utility is a negative function of another’s payoff

Sense of justice and fairness - people prefer ‘fair’ outcomes and/or want to maximise the social ‘good’ - utilitarian - fairness norms

Question 22

What are social realities/complications that can change outcomes in game theory?

Answer 22

Reciprocity - Reciprocity involves rewarding good behavior and punishing bad behavior in interactions. Ultimatum and Bargaining Games: If someone makes a fair offer, they are rewarded by acceptance. If they make an unfair offer, they are punished by rejection.

Trust - Trust is the belief that others will act cooperatively or fulfill expectations.
Examples:
Centipede Games: Trust enables players to continue passing the pot rather than ending the game early.
Public Good Games (prisoners’ dilemma): Cooperation is sustained when trust exists that others will contribute fairly to a shared resource.

What it Means: Some decision-making scenarios are complicated or uncertain, making it difficult for players to act “rationally.”
Examples:Finitely Repeated Prisoner’s Dilemma: In these games, rational cooperation can occur despite the temptation to defect, especially under uncertainty or unclear outcomes.

Question 23

Do social preferences suggest that culture matters in game theory?

Answer 23

Yes, social preferences suggest that culture matters. For example, culture can determine where people get their rules, expectations or notions of fairness from.

Question 24

Is it still a prisoners’ dilemma if the Nash equilibrium is cooperation

Answer 24

No