Lecture 2: Games

Interdependence

When people’s actions affect both their own outcomes and those of others

Outcome/Welfare

The results of actions (e.g., money, happiness, health, grades)

Game (in game theory)

A structured situation where players’ choices determine outcomes for all involved

Actors

The decision-makers in a game

Actions

The possible choices each player can make

Outcome

The result of a combination of players’ actions

Rationality

Maximizing one’s own payoff (not about being smart or reasonable)

Simultaneous decision

A situation where players choose without knowing the other’s action

Dominant strategy

A strategy that yields the best outcome regardless of what others do

Prisoner’s Dilemma

A game where defection is always individually optimal but mutual cooperation is better collectively

Cooperation

Choosing an action that benefits both players

Defection

Choosing an action that maximizes own payoff at the expense of others

Nash Equilibrium

A situation where no player can improve their payoff by changing their strategy alone

“No regrets” equilibrium

A state where each player is satisfied with their choice given others’ actions

Pareto Optimal

An outcome where no one can be better off without making someone else worse off

Social dilemma

A situation where individual incentives conflict with collective welfare

Stag Hunt

A game where cooperation is best but risky because it depends on trust

Stag Hunt cooperation

Hunting stag (high reward if both cooperate)

Stag Hunt safe option

Hunting hare (lower reward but guaranteed)

Key conflict in Stag Hunt

Safety vs cooperation

Trust (in games)

Belief that the other player will cooperate

Difference PD vs Stag Hunt

PD = temptation to defect; Stag Hunt = fear of others defecting

Chicken Game

A game modeling conflict where players choose between compromise and confrontation

Swerve (Chicken)

Cooperative action (compromise)

Straight (Chicken)

Defection (aggressive strategy)

Key conflict in Chicken

Game of conflict vs compromise

Worst outcome in Chicken

Mutual defection (both crash)

Best outcome in Chicken

One defects while the other cooperates

Matching Pennies

A zero-sum game where one player wins and the other loses

Zero-sum game

A game where one player’s gain equals the other’s loss

Goal in Matching Pennies

Be unpredictable and outguess the opponent

Mixed strategy

Randomizing choices to avoid being predictable

Mixed strategy equilibrium

A state where players randomize so expected payoffs are equal

Equilibrium in Matching Pennies

No pure strategy equilibrium exists

Game analysis step 1

Identify actors

Game analysis step 2

Identify actions

Game analysis step 3

Identify outcomes

Game analysis step 4

Determine rational choices

Game analysis step 5

Identify equilibrium and Pareto outcomes

Strictly dominant strategy in PD

Defection (always better regardless of opponent)

Number of equilibria in Stag Hunt

Two Nash equilibria

Number of equilibria in Chicken

Two Nash equilibria (each favors a different player)

Dominant strategy in Stag Hunt

None

Dominant strategy in Chicken

None

Equilibrium vs Pareto difference

Equilibrium = individual stability; Pareto = collective efficiency

Why analyze games

To predict rational behavior and compare with real human behavior

Benchmark (in game theory)

A reference point for how rational players should behave

Human behavior vs theory

People often deviate from rational predictions

Games in experiments

Simplified models used to study cooperation, trust, and conflict

Framing

The way a game is presented, influencing behavior

Mindset effect

Games can influence how people think in later interactions

Trust mindset

Triggered by aligned-interest games (e.g., Stag Hunt)

Distrust mindset

Triggered by conflict games (e.g., Trust game)

Carryover effect

Behavior in one game affects behavior in later games

No neutral baseline

Previous experiences always influence decisions