GAME THEORY 101

What is Game Theory?

Definition: the study of strategically interdependent behavior

Strategic Interdependence: What I do affects your outcomes and what you do
affects my outcomes

Not just about winning and losing (though it could be)

Not just about one person winning or losing
GT is a little bit broader than that
You can talk about a situation where you can help each other win
Incentives: to work together, or to beat the other guy

Why Study GT?

1. The logic of strategically interdependent situations gets extremely

complicated extremely fast
- GT gives us accounting tools/standards to make sure that what were
saying actually follows on our assumptions
2. GT allows us to quickly draw parallels from one situation to another
-This will allow you to think on your feet much better than you can today.

What is a Nash Equilibrium?

-It is a set of strategies, one for each player, such that no player has incentive to
change his or her strategy given what the other players are doing
A pure strategy Nash Equilibrium is when players do not randomize between two
more or more strategies.
What does that mean?
A Nash Equilibrium is a law that no one would want to break even in the absence of
an effective police force.
Example:

Traffic

Pretend that the police do not exist.

The government passes a law.
The law is a Nash Equilibrium if everyone wants to follow it.

Would drivers want to break traffic rules?

TRAFFIC
In some situations, following stoplights is a Nash Equilibrium.
1. Suppose two cars are driving at each other from perpendicular directions.
2. The stoplight is red for one of them and green for the other.
3. If the police could not ticket the drivers, would they want to break the law?
No.
They are following the law not for the sake of following it but because it is in their
best-interest to follow the same.