Deck 20: Game Theory, Strategic Decision Making, and Behavioral Economics

Question 1

Why is game theory more flexible than standard models of market behavior?

Answer 1

Game theory is a highly flexible tool that can be applied to many situations without making the restrictive assumptions of the supply and demand model or the variants of it, such as monopoly and monopolistic competition. Game theory allows us to develop more precise models of oligopolistic markets and of all situations that involve strategic interaction.
It offers a new set of models that can be better tailored to fit the actual problems economists face, and thus are more flexible than standard models. A different game theory model can be developed for each different situation and for each different set of assumptions. So rather than have a single model with a single equilibrium solution, in game theory there are many models that often have multiple solutions.

Question 2

What is meant by "cheap talk"? Does it influence the outcome of games?

Answer 2

Cheap talk refers to communication that occurs before a game is played that carries no cost and is backed only by trust, and not by any enforceable agreement. Standard economic theory predicts that cheap talk will not influence the outcome of games since players cannot trust the other players to keep their word. However, there is considerable experimental evidence that cheap talk creates trust and influences outcomes.

Question 3

What is meant by a "payoff matrix"? What are the three things that are shown in the payoff matrix?

Answer 3

A payoff matrix is a table that shows the outcome of every choice by every player, given the choices of all other players. The payoff matrix shows the three elements of any game: the player, their possible strategies, and their contingent payoffs for each possible outcome.

Question 4

What is the link between behavioral economics and formal game theory?

Question 5

In a single play version of the ultimatum game, what is the optimal strategy, assuming people are only concerned with how much money they receive?

Question 6

Give two examples of seemingly irrational behavior that behavioral economists are attempting to explain.

Question 7

What is a "screening question"?

Question 8

What is a cooperative game?

Question 9

Give an example of the prisoner's dilemma game.

Question 10

What is a Nash equilibrium?

Question 11

In the two-thirds game, what is the Nash equilibrium? Why would choosing the optimal strategy normally cause one to lose?

Question 12

How does a dominant strategy differ from a mixed strategy? Give examples of each type of strategy.

Question 13

What is meant by "game theory?"

Question 14

Why is game theory useful to economists?

Question 15

Explain what is meant by Nash equilibrium. Must it be the solution that is jointly best for all players?

Question 16

Why is the prisoner's dilemma game important to economists?

Question 17

Why is the standard model of economic choice relevant even if the findings of behavioral economists are true for many individuals?

Question 18

What is the difference between sequential games and simultaneous move games? Give an example of each type of game.

Question 19

What is a "non-cooperative" game?

Question 20

What is the difference between a dominant strategy and a mixed strategy? Give an example of each type of strategy.

Question 21

How can the results of game theory be applied to public policy?

Question 22

Why do behavioral economists use experiments in which people play formal games?

Question 23

If 90 percent of people operate as behavioral economic suggests, does that mean that the standard model is no longer applicable?

Question 24

Consider the following payoff matrix that shows the outcomes for two individuals, Aaron and Bob, as they try to decide whether or not to ask out the prettiest and smartest girl in school, Caroline. Caroline likes Aaron better than Bob, but will accept Bob's invitation if Aaron does not ask her out. Assuming that having your offer for a date accepted is the best possible outcome, being rejected is the worst, and having "nothing" happen is in the middle.
What will each of the boys decide to do?

Question 25

What is a "Vickrey auction"? What is the value of this form of auction?

Question 26

What is meant by "informal game theory"?

Question 27

Describe an experiment that demonstrated endowment effects.