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theory
No 10, 5 10, 10
New example
Person 2
We will go
Yes No through the
same steps
to
Perso
n1 Yes 20, 20 5, 10 determine
NE
No 10, 5 10, 10
Two NE possible
Person 2
(Yes, Yes) and
Yes No (No, No) are
both NE
Although (Yes,
Perso
Yes) is the
n1 Yes 20, 20 5, 10 more efficient
outcome, we
have no way
to predict
No 10, 5 10, 10 which
outcome will
actually occur
Two NE possible
When there are multiple NE that
are possible, economic theory tells
us little about which outcome
occurs with certainty
Two NE possible
Additional information or actions
may help to determine outcome
If people could act sequentially
instead of simultaneously, we could
see that 20, 20 would occur in
equilibrium
Sequential decisions
Suppose that decisions can be made
sequentially
We can work backwards to determine
how people will behave
We will examine the last decision first
and then work toward the first decision
To do this, we will use a decision tree
Decision tree in a
sequential game: Person
1 chooses first 20, 20
Person 2
chooses
yes
Person B
Person 2 5, 10
1
chooses
choose
no
A s yes
Person 2
Person C chooses 10, 5
1 yes
choose
s no
Person 2
chooses
no 10, 10
Decision tree in a
sequential game: Person
1 chooses first
20, 20
Person 2 Given point B,
chooses
yes Person 2 will
Person B
1 Person 2 5, 10 choose yes
choose chooses
no
(20 > 10)
A s yes
Person 2
Person C chooses 10, 5
1 yes
Given point C,
choose
s no Person 2 will
Person 2
chooses
choose no
no 10, 10 (10 > 5)
Decision tree in a
sequential game: Person
1 chooses first
20, 20 If Person 1 is
Person 2
chooses rational, she will
yes
Person B ignore potential
Person 2 5, 10
1
chooses
choices that
choose
s yes
no Person 2 will not
A
Person 2 make
Person C chooses
1 yes
10, 5 Example: Person
choose 2 will not choose
s no yes after Person
Person 2
chooses 1 chooses no
no 10, 10
Decision tree in a
sequential game: Person
1 chooses first
20, 20 If Person 1 knows
Person 2
chooses that Person 2 is
yes
Person B rational, then she
5, 10
1 Person 2 will choose yes,
chooses
choose since 20 > 10
no
A s yes
Person 2
Person 2 makes a
Person C chooses decision from
10, 5
1 yes
choose point B, and he
s no will choose yes
Person 2 also
chooses
no 10, 10 Payout: (20, 20)
Summary
Game theory
Simultaneous decisions NE
Sequential decisions Some NE may
not occur if people are rational
Can you think of ways game
theory can be used in these
games?