game theory intro

This version: 8. March 2021 University of St. Gallen Dennis Gärtner Course Nr.: 4,200 | 4,202 Microeconomics III Supplementary Notes for: 2.0 Game Theory, Introduction Intro game. I usually start this lecture with an introductory classroom game, which you will find in a separate upload. The upload contains the game itself (on the first slide), the (equilibrium) analysis, and last year’s results. I recommend that at this point, you look only at the game itself (the first slide), that you really try to put yourself into the situation (or even try playing it with your quarantine-mates?) and imagine how you would respond, and that you later return to the rest of the slides *after* having completed 2.0 and 2.1. At this point in the lecture, the game is only meant to alert you to the key issue in game theory: that in order to determine what an “optimal” response on your part is, you need to think about what you believe others will do. Additional motivation. I already sent you a short piece about the role of game theory in controlling outbreaks: http://theconversation.com/game-theory-can-help-prevent-disease-outbreaks-102934. This was not only for fun: if you look carefully, you will quickly find decisions taken (and not taken) in recent days where it might have been useful if decisionmakers had a better grasp of game theory and the concept of externalities. As a place to start: what do you think about the concept that, in Switzer-land, most of us will have to finance our Covid-19-Test ourselves (due to high deductibles)? What do you think about the concept of “just informing people”, and then counting on the fact that all individ-uals, employers, restaurant owners, cantons etc. will “act responsibly”? Types of games. The categorization of games into static vs. dynamic and complete info vs. incomplete info is mainly intended as a preview and to make sense of the structure of the ensuing chapters/lec-tures. You will have a better idea of what all of this means when we get to the relevant chapters. Non-constant sum games. At the risk of going on a bit of a tangent, there are some fun and practically relevant remarks to make here: • “Games” in the narrower everyday sense of the word (chess, rock-paper-scissors, etc.) are typ-ically “constant sum games”, meaning that whatever one player wins, another loses. “Game theory” includes, but is not limited to such games. • Some of the brightest minds seem to be confused by this at times. For instance, commentators have repeatedly tried to rationalize the current US president’s trade strategy as one which is built on the idea of a constant- (or zero-) sum game: whatever China or the EU loses (because of tariffs, quotas, etc.), America wins. Which, to put it mildly, runs a bit counter to most trade theorists’ view that trade has the potential to make everyone strictly better off. • There is, however, also the reverse fallacy of not realizing that you actually are in a constant-sum game. For instance, essentially by construction, short-run trade in financial assets (such as if your friend or even your bank adviser tells you that “now is an excellent moment to buy stocks in X” or “currency Y is undervalued”) is a zero-sum game: whatever you win, somebody else in the market must lose. The problem being that the other side of the market includes professional investors on Wall Street who eat small-time retail investors like you and me for lunch. Which in turn is why most (academic) specialists will tell you that, as a small retail in-vestor, it’s not a good idea to try to beat (or “time”) the market. (Which is not to say that long-term investments into stocks are a bad idea in terms of risk allocation – see our previous chap-ter.) Additional (optional) resources, textbooks. Slide material is self-contained, and there is no further required reading. If you ever feel you would like to know a bit more: the material is canonical, meaning you will quickly find alternative explanations or expositions online (or possibly even in micro books Note: These notes were written in Spring 2020 to help make up for cancelled lectures. I am shar-ing them this year because you might find them useful. However, please note that they are not kept up to date, so some references (to slides, events, etc.) may well be outdated. 2 which you already own). If you feel you would nonetheless like to check textbooks: If you want a slim and accessible book which covers quite a lot, but not everything at quite the level of detail, then Bob Gibbons' "Primer In Game Theory"/"Game Theory for Applied Economists" ( https://www.ama-zon.de/Theory-Applied-Economists-Robert-Gibbons/dp/0691003955) might be your friend.1 If you want a book with more complete and detailed coverage (but also a lot more material than we will cover), then I recommend either Martin Osborne's "An Introduction to Game Theory" (https://www.amazon.de/Introduction-Game-Theory-Martin-Osborne/dp/0195322487), or Steve Tadelis' "Game Theory: Introduction" (https://www.amazon.de/Game-Theory-Introduction-Steven-Tadelis/dp/0691129088). 1 From within the university network (or via university VPN), this book is also available for free on JSTOR at https://www.jstor.org/stable/j.ctvcmxrzd.

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