Topic 2

Question 1

What is the investment decision ?

Answer 1

How much would you invest in a public fund, compared to a private account, if they would pay you different returns ?

Question 2

What are the elements of game theory?

Answer 2

Players- more than one decision maker
Interaction- what a player does must affect the other player(s) - player i’s actions must affect player j’s payoffs
Strategic decision- players are aware of their interaction- player i is capable of thinking of what player j would do
Rationality- best actions- players rank every possibly outcome according to own preferences, decisions based on goal of maximising own payoffs

Question 3

Representation of expected utility

Answer 3

Expected utility- U=p1u(X1) + p2u(X2) + … + pnu(Xn)

Question 4

What are the ‘rules’ of a game?

Answer 4

• WHO is playing
• WHAT the players can do
• WHEN players move
• HOW MUCH players get

Question 5

What is common knowledge?

Answer 5

• everyone KNOWS the rules

- everyone KNOWS that everyone knows the rules