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Chapter 1: Introduction to Strategic
Reasoning
Copyright by Worth Publishers
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Game Theory: Goal
Our goal is to understand how humans behave when interacting
with others.
Google employees, football players, CEO and World Bank
member countries.
You and your family, neighbors, and friends.
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Game Theory: Objectives
Understand the manner in which people behave – why they do
what they do.
Provide guidance on what to do when interacting with other
people.
You can use game theory to explain, predict, and proscribe
behavior.
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Some Examples
How do you resolve conflict with your parents?
How do you engage in a sporting contest?
How do firms compete in the marketplace?
How do players on reality shows such as Survivor conspire?
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What is strategic interdependence?
Game theory studies situations where there is strategic
interdependence.
Interdependence – what you do affects the well-being of others.
Strategic interdependence – what is best for you to do depends
on what someone else does.
Kicking a winning goal vs. kicking a penalty kick.
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The problem of infinite regress
Strategic interdependence makes it challenging to decide what
you should do.
Imagine that Greg and Marcia get separated in a museum.
Greg’s cell phone is dead. Since they cannot contact each other,
each must decide where to meet. How?
Game theory gives us a way to break the chain of infinite
regress.
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Greg and Marcia at the museum
Why can’t Greg simply go to
where he thinks Marcia will
go?
Because Marcia will go to
where she thinks Greg will
go.
So Greg needs to think about
what Marcia thinks he will
do.
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Greg and Marcia at the museum
This thought process goes on
and on.
Each person is thinking
about what the other person
is thinking about what the
other person is thinking . . .
That’s infinite regress.
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1.1 A Sampling of Strategic Situations
Price-matching guarantees: Do they represent fierce
competition or are they a way firms can raise prices?
Ford and the $5-a-day wage: How can paying a wage more
than double the going wage increase profits?
Nuclear standoff: How can the United States use
brinkmanship regarding North Korea’s nuclear weapons
program?
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1.1 A Sampling of Strategic Situations
Grading to the curve: How did some students figure out a
way for everyone to receive an A on a professor’s final?
Galileo and the Inquisition: Why did the Pope refer the case
to the Inquisitors? Should Galileo have confessed?
Helping a stranger: Why is it that the more people there are to
provide help to a stranger in need, the more likely the person in
need is neglected?
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1.1 A Sampling of Strategic Situations
Average bid auctions in Italy: How did a new bidding format
allow bidders to collude and set excessively high bids?
Trench warfare in World War I: How did Allied and German
soldiers achieve and sustain occasional truces between periods
of fighting?
Doping in sports: Why is doping ubiquitous? How can it be
stopped?
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1.1 A Sampling of Strategic Situations
Extinction of the wooly mammoth: Do humans always have
such an impact on nature? If not, is there a way we can solve
the problem of global warming?
We will answer some of these question and others throughout
the course.
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1.2 The Game of Concentration
Angela and Zach have perfect memories, and play a simple
version of Concentration. They face six cards – two queens,
two kings, and two tens. From prior rounds, they know where
one queen is.
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1.2 The Game of Concentration
Angela takes a turn. On her first turn she draws a king.
Which other card should she flip?
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1.2 The Game of Concentration
Suppose she flips over the second card and it is a queen.
Zach is now able to get both queens, and possibly more. How?
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1.2 The Game of Concentration
Suppose Angela turned over the second card, and it was a 10.
Zach is now able to clear the entire board. Why?
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1.2 The Game of Concentration
The table summarizes Angela’s possibilies when she faces
Board 2. Which card should she draw?
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1.2 The Game of Concentration
If Angela draws the queen, Zach now faces this board. He is no
longer guaranteed a pair.
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1.2 The Game of Concentration
What are the lessons you have learned from this game?
Choosing an unknown card has costs, but also benefits.
Sometimes it is best to make a move that restricts the amount
of information your rival has.
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1.3 Psychological Profile of a Player
Game theory models strategic situations.
An environment and the people who interact in that
environment.
To understanding or predict behavior we need to know two
things.
Preferences and beliefs.
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1.3.1 Preferences
We assume that a person’s preferences are complete and
transitive.
If your preferences are complete you can say whether:
You prefer A to B
You prefer B to A
You are indifferent between A and B
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1.3.1 Preferences
We assume that a person’s preferences are complete and
transitive.
If your preferences are transitive:
If you prefer A to B and if you prefer B to C
Then you must prefer A to C
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1.3.1 Preferences
What happens if people have
intransitive preferences?
Suppose Jack prefers A to B
and prefers B to C, but
prefers C to A.
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1.3.1 Preferences
From preferences to utility.
If you prefer A to B, then you
get more utility from A than
from B.
Emily choosing a sorority.
What can you say about
Emily’s preferences?
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1.3.1 Preferences
The numbers themselves do not really matter as long as they
respect preferences.
Sometimes it is useful to describe people’s preferences with a
utility function.
A utility function captures all the relevant information about
a person’s preferences.
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1.3.2 Beliefs
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1.3.2 Beliefs
Sometimes the utility you receive depends on what you do and
what you believe another person does.
People are endowed with preferences, but not beliefs.
Two processes from which beliefs emerge (experiential
learning or simulated introspection)
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1.3.2 Beliefs
Two processes from which beliefs emerge:
Experiential Learning
Form beliefs through repeated interaction
You believe that people will do what they did in the past.
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1.3.2 Beliefs
Two processes from which beliefs emerge:
Simulated Introspection
Put yourself in the other person’s shoes to form beliefs
about what they will do.
It requires both self-awareness and a theory-of-mind
mechanism (ToMM)
