“Only the paranoid survive.”
- Andy Grove, Co-founder of Intel
What is Game Theory?
“No man is an island, entire on itself”
— John Donne, 1624
Game theory is the study of rational behavior
in interdependent situations
A game is any situation where the outcome of
your actions depends on the actions of others
Games We Play
Games Economists Play
Regulating collusion free-riding
Standards setting coordination
Market entry commitment
Business attraction prisoner’s dilemma
Tax compliance mixed strategies
Product announcement credibility & bluffing
Renewable resources congestion
Used goods markets information manipulation
Governments play … mixed strategies
Businesses play …
Employee drug testing
Sports teams play …
Run or pass? Fast ball or slider?
Defense departments play
Where and when to attack
Politicians play …
Campaign fund expenditure
Make poison or just pretend to make poison?
Board games, card games, video games,
sports games, computer games
Real Life Games:
Notwin-lose: possible for all players to win (or lose)
Apart from the law, there is no rule book
Others will change the game to their advantage
Success comes from playing the right game
Why Study Game Theory?
Knowing game theory does not guarantee winning
Framework for thinking about strategic interaction
Predict outcomes before the game is played
Manipulate the rules of the game (within legal and ethical
boundaries) to give yourself an advantage
“Game theory is hot”
— The Wall Street Journal, 13 February 1995
Students trained in game theory work for
federal regulatory agencies human resource departments
financial firms pricing divisions
strategy consultancies intelligence agencies
public policy firms the military
political campaigns sports teams
A Brief History
Course web site
Check after each lecture
Recognizing the game
Anticipating rival’s moves
Looking forward – reasoning back
Sensibility of being unpredictable
Cooperation and agreeing to agree
Winning the game
Credibility, threats, and promises
Signaling, screening, incentives
Bargaining & Auctions
Participating and designing
Participate by midnight each Sunday
First and last game have different due date
Timed – no preparation required
Scores are known
Opponents are not
Not graded (but required)
Discuss what you did and why
Quizzes & Problems
Six quizzes (best 5 count)
Can replace missed or lowest quiz
Game theory is everywhere. Find it.
Midterm 20 %
Final Exam 35 %
Quizzes (and Assignment) 25 %
Class Participation 10 %
Games (participation) 10 %
Keys to Success
After each lecture:
Visit course web site
Do assigned readings
Do sample problems
Don’t fall behind
They have a lovely
“No cell phone”
Interactive Decision Theory
You are goal-driven and considering your options
So is everyone else
The Golden Rule
Never assume that your opponents’
behavior is fixed.
Predict their reaction to your behavior.
vs. Game Theory
Ten of you go to a restaurant
If each of you pays for your own meal…
This is a decision problem
If you all agree to split the bill...
Now, this is a game
May I recommend that with the Bleu
Cheese for ten dollars more?
It is only
a dollar more
Check splitting policy changes incentives.
Do bicycle helmets cause fewer injuries?
Should airplanes require children to
be in their own seats?
Why extra customer capacity can be bad
Can you be better off when preparing to trade with
others by throwing some of your goods away?
Why cannibalize your own sales?
Can developing a product that consumers
substitute for another of your products be good?
Where is it better to have a car break down?
Are you more likely to get someone to stop and
help on a busy street or a deserted one?
Pick an option:
Option 1: $50
Option 2: $40
Option 3: $20
Now What Do You Do?
Pick an option:
Option 1: $50 or $60
Option 2: $40 or $80
Option 3: $20 or $90
The Golden Rule
Spend as much time thinking about your
opponents’ strategy as you do your own.
Is Game Theory Moral?
‘Game Theory’ Excuse for Anything
A student cheats on his exam. A corporation fudges its Game theory goes on to say that you should expect
accounts to boost its stock price. A professor lies about people to lie, and so you also might want to lie. Isn't this
his past. A politician sends out a newsletter with one a wonderful concept to be teaching our college students?
opinion to one group of constituents, another newsletter Here's a quote from one of the textbooks used in game
with an opposing opinion to another group. A store theory courses, ''Thinking Strategically,'' by Avinash
chain uses underhanded methods to gain locations. Are Dixit and Barry Nalebuff: ''Individuals' incentive to
these all independent actions, or part of a larger attitude cheat on any agreement should be recognized and made
Teddy Milne that's eating away at ethics in this country?
To me, they seem part of the ''realist'' approach to
a part of their strategy choice.'' In a roundabout way, this
teaches that cheating is not only acceptable, but to your
politics, especially as exemplified by ''game theory.'' advantage.
Game theory starts out by saying forget about Further, game theory suggests that in order to get a
October 22, morality, feelings and emotions; we are going to assume competitive edge, you might want to pretend to be
2002 that a rational person is going to always act in his own
insane, so that your opponent won't be able to judge
which way you're going to jump.
In other words, self-interest is king, a theory as old as Well, we've seen that in politics, haven't we? Perhaps
man. Thucydides noted it in 400 B.C. Machiavelli Dr. Strangelove was only pretending. However, this
described it in the 16th Century, and perhaps every seems in reality a pretty insane course to take, and
generation has come up with theories, explanations and might easily have unintended consequences.
justifications for acting selfishly. (see “Mindless Commentary”, p. 3)
A Game - Redux
The rules of a game
The assumptions of game theory
Our first online game