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Game Theory

Welcome to the next lesson of this module where we will cover the topic of game theory.

The following chapter will consider Game Theory and group co-operation in economics. Game theory looks to present models of conflict and cooperation which may exist between intelligent, and rational decision-makers; actors in the game. Essentially, it is a study on interaction, considering how economic agents produce outcomes with respect to their preferences (or utilities) of those agents. The most well-known example of game theory can be seen as the ‘Prisoner’s Dilemma’. The games showcase why two completely ‘rationale’ actors might not cooperate, even though it is in their best intentions to do so. The visual below displays a standard game between two prisoners. In this example, there are two prisoners who both should decide whether they remain quiet, or confess. The important factor to mention here is that while it would be better is both prisoners remained quiet, neither of them know what the other will decide; there is no information flow between the decision-makers.

Learning outcomes

To be able to:

  1. Explain the game theory
  2. Understand the different types of equilibrium
  3. Have an awareness of more complex multi-move games

Begin the Lecture