1. WELCOME TO ECONOMICS 1050: STRATEGY, CONFLICT & COOPERATION
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WELCOME TO ECONOMICS 1050: STRATEGY, CONFLICT & COOPERATION
Spring 2017
Tu, Th 2:30-4
Harvard 102
Instructor: Robert Neugeboren
TF: Mauricio Fernandez Duque
Website:
Office Hours: W Brattle St, Rm 219
Sections: TBA

2. Thomas Schelling ( )
Thomas Schelling was an American economist; PhD, Harvard, 1948; joined the faculty in 1956; cofounded HKS; taught Econ 1030: Strategy and Conflict ( ?).
He was awarded the 2005 Nobel Prize in Economics (shared with Robert Aumann) for "having enhanced our understanding of conflict and cooperation through game theory analysis".
Schelling in 2007

3. Today’s Agenda Go Over Syllabus What is Game Theory? An Experiment
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Today’s Agenda
Go Over Syllabus
Objectives
Requirements
Policies
Readings
Topics
What is Game Theory?
An Experiment
Next Time

4. 4/11/2018
Description
Game theory is the study of interdependent decision-making. In the early days of the cold war, game theory was used to analyze an emerging nuclear arms race; today, it has applications in economics, psychology, business, politics, law, biology, and other fields. In this course, we will explore the “strategic way of thinking” as developed by game theorists over the past eighty years. Special attention will be paid to the move from zero-sum to nonzero-sum game theory.

5. 4/11/2018
Description
Students will learn the basic solution concepts of game theory -- including minimax and Nash equilibrium -- by playing and analyzing games in class, and then we will take up some game-theoretic applications in negotiation settings: the strategic use of threats, bluffs and promises. We will also study the repeated prisoner’s dilemma game and investigate how cooperative behavior may emerge in a population of rational egoists.

6. 4/11/2018
Description
This problematic -- “the evolution of cooperation” -- extends from economics and political science to biology and artificial intelligence, and it presents a host of interesting challenges for both theoretical and applied research. We will consider the changing context for the development of game theory today, in particular, the need to achieve international cooperation on economic and environmental issues.

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Description
Finally, we will discuss behavioral game theory, a relatively new field incorporating methods and insights from experimental economics and cognitive psychology.

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Objectives
The course has two main objectives: to introduce students to the fundamental problems and solution concepts of noncooperative game theory; and to provide an historical perspective on its development, from the analysis of military conflicts to contemporary applications in economics and other fields.
No special mathematical preparation is required.

9. Requirements 10% Participation: Attendance is required.
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Requirements
10% Participation: Attendance is required.
20% Problem Sets: 4, every 2-3 weeks. 30% Midterm Exam: In class, March % Final Exam: 3 hours, TBA.

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Participation
Participation by all students is in lecture and section is strongly encouraged. Sections will be especially helpful in preparing for problem sets and reviewing for exams. The quality of your section experience depends heavily on the involvement of other students. As such, fostering a supportive, cooperative environment will be essential. Part of your participation grade will be based on your contribution to the learning environment in the classroom.

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Problem Sets
There will be 4 problem sets assigned roughly every other week, due at the start of section. Each problem set will be graded on a 10 point scale and will count for 5% of your final grade.
Late problem sets will not be accepted (except with notification from your RD).

12. 4/11/2018
Course Policies
Problem Sets: Discussion and the exchange of ideas are essential to doing academic work. For assignments in this course, you are encouraged to consult with your classmates as you work on problem sets. However, after discussions with peers, make sure that you can work through the problem yourself and ensure that any answers you submit for evaluation are the result of your own efforts. In addition, you must cite any books, articles, websites, lectures, etc. that have helped you with your work using appropriate citation practices. Similarly, you must list the names of students with whom you have collaborated on problem sets.

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Academic Honesty
Harvard takes matters of academic honesty very seriously. While you may discuss assignments with your classmates and others, make sure any written material you submit is your own work. Use of old course materials, including exams and problem sets from online sources, is prohibited. You should consult “Academic Integrity and Academic Dishonesty” in the Harvard College Handbook for Students to familiarize yourself with the possible serious consequences of academic dishonesty.

14. Website The course website is a very useful place for you to visit:
4/11/2018
Website
The course website is a very useful place for you to visit:
All official course announcements (e.g., deadlines, class cancellations, exam notices, etc.) will appear on the homepage, and all assignments and answer keys will be posted there. There is also a discussion section, practice problems, additional readings, dropboxes to submit assignments, links to interesting sites, and other useful resources.

15. Readings Axelrod, The Evolution of Cooperation (1984).
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Readings
Axelrod, The Evolution of Cooperation (1984).
Gintis, Game Theory Evolving (2000).
Poundstone, Prisoner’s Dilemma (1992).
Rapoport, Two-Person Game Theory (1966).
Schelling, The Strategy of Conflict (1960).
-- Choice and Consequence (1984)
Available at the Coop (and elsewhere)
Additional Readings are available on the course website.

16. Readings READINGS RECOMMENDED FOR FURTHER INTEREST
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Readings
READINGS RECOMMENDED FOR FURTHER INTEREST
Binmore, Game Theory & Social Contract, Vol II (1998).
Dutta, Strategies & Games (1999).
Hargreaves-Heap & Varoufakis. Game Theory: A Critical Introduction (1995).
Kreps, Game Theory & Economic Modeling (1994).
Raiffa, The Art & Science of Negotiation (1982).

17. Topics UNIT I OVERVIEW AND HISTORY UNIT II THE BASIC THEORY
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Topics
UNIT I OVERVIEW AND HISTORY
UNIT II THE BASIC THEORY
March 9 MIDTERM
UNIT III THE EVOLUTION OF COOPERATION
UNIT IV BEYOND HOMO ECONOMICUS
May ?? FINAL EXAM

18. Topics UNIT I OVERVIEW AND HISTORY Introduction: What is Game Theory?
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Topics
UNIT I OVERVIEW AND HISTORY
Introduction: What is Game Theory?
Von Neumann and the Bomb
The Science of International Strategy
The Logic of Indeterminate Situations

19. Topics UNIT II THE BASIC THEORY Zerosum Games Nonzerosum Games
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Topics
UNIT II THE BASIC THEORY
Zerosum Games
Nonzerosum Games
Nash Equilibrium and Subgame Perfection
Bargaining Problems and (some) Solutions
Review
3/9 MIDTERM
SPRING BREAK

20. Topics UNIT III THE EVOLUTION OF COOPERATION
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Topics
UNIT III THE EVOLUTION OF COOPERATION
The Tragedy of the Commons
Repeated Games: the Folk Theorem
Evolutionary Game Theory
A Tournament
Beyond Tit for Tat
How to Promote Cooperation
Unit Review

21. Topics UNIT IV BEYOND HOMO ECONOMICUS Schelling’s Critique
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Topics
UNIT IV BEYOND HOMO ECONOMICUS
Schelling’s Critique
Behavioral Game Theory
Social Preferences
Experimental Economics
Learning Models
Evolution in Biological & Natural Systems Conclusions and Review
5/?? FINAL EXAM

22. UNIT I: Overview & History
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UNIT I: Overview & History
Introduction: What is Game Theory?
Von Neumann and the Bomb
The Science of International Strategy
The Logic of Indeterminate Situations
1/24

23. What is Game Theory? Games of Strategy v. Games of Chance
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What is Game Theory?
Games of Strategy v. Games of Chance
The Strategic Way of Thinking
An Experiment
Next Time

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What is Game Theory?
If we confine our study to the theory of strategy, we seriously restrict ourselves by the assumption of rational behavior – not just of intelligent behavior, but of behavior motivated by a conscious calculation of advantages, a calculation that in turn is based on an explicit and internally consistent value system (Schelling, 1960, p. 4).

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What is Game Theory?
Normative theories tell us how a rational player will behave.
Descriptive theories tell us how real people actually behave.
Prescriptive theories offer advice on how real people should behave.

26. Definitions (preliminary)
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What is Game Theory?
Definitions (preliminary)
Rationality: The assumption that a player will attempt to maximize her expected payoff from playing a game.

27. Definitions (preliminary)
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What is Game Theory?
Definitions (preliminary)
Rationality: The assumption that a player will attempt to maximize her expected payoff from playing a game.
Strategy: A complete plan of action for every possible decision in a game.

28. Definitions (preliminary)
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What is Game Theory?
Definitions (preliminary)
Rationality: The assumption that a player will attempt to maximize her expected payoff from playing a game.
Strategy: A complete plan of action for every possible decision in a game.
Equilibrium: A state of the game in which no player has an incentive to change her strategy.

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What is Game Theory?
Rationality: choosing the best MEANS to attain given ENDS.
MEANS ENDS
Actions Preferences
(x, y) A > B
B > A
where: x = buy A A = B
y = buy B

30. What is Game Theory? Uncertainty ?
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What is Game Theory?
Rationality: choosing the best MEANS to attain given ENDS.
MEANS ENDS
Actions Preferences
(x, y) A > B
B > A
where: x = buy A A = B
y = buy B
Uncertainty ?

31. What is Game Theory? N = 1 n ¥ MONOPOLY ? PERFECT COMPETITION
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What is Game Theory?
N = n ¥
MONOPOLY ? PERFECT
COMPETITION
Price setter ? Price taker
Inefficient ? Efficient
Game theory confronts this problem at the heart of economic theory: a theory of rational behavior when people interact directly, and prices are determined endogenously.

32. 4/11/2018
Games of Chance
Player 1
You are offered a fair gamble to purchase a lottery ticket that pays $1000, if your number is drawn. The ticket costs $1.
Buy Don’t Buy
(1000) (-1) (0) (0)
Chance
E.g., Lottery, roulette.

33. 4/11/2018
Games of Chance
Player 1
You are offered a fair gamble to purchase a lottery ticket that pays $1000, if your number is drawn. The ticket costs $1.
The chance of your number being chosen is fixed by statistical laws.
Buy Don’t Buy
(1000) (-1) (0) (0)
Chance
E.g., Lottery, roulette.

34. Games of Strategy Player 2 chooses the winning number. Player 1
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Games of Strategy
Player 1
Player 2 chooses the winning number.
Buy Don’t Buy
(1000) (-1) (0) (0)
Player 2
E.g., Lottery, roulette.

35. Games of Strategy Player 2 chooses the winning number.
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Games of Strategy
Player 1
Player 2 chooses the winning number.
What are Player 2’s payoffs?
Buy Don’t Buy
(1000,-1000) (-1,1) (0,0) (0,0)
Player 2
E.g., Lottery, roulette.

36. Games of Strategy Games of strategy require at least two players.
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Games of Strategy
Games of strategy require at least two players.
Players choose strategies and get payoffs. Chance is not a player!
ON PAYOFFS: profits; utils, risk neutral.

37. Games of Strategy Games of strategy require at least two players.
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Games of Strategy
Games of strategy require at least two players.
Players choose strategies and get payoffs. Chance is not a player!
In games of chance, uncertainty is probabilistic, random, subject to statistical regularities.
In games of strategy, uncertainty is not random; rather it results from the choice of another strategic actor.
ON PAYOFFS: profits; utils, risk neutral.

38. Games of Strategy Games of strategy require at least two players.
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Games of Strategy
Games of strategy require at least two players.
Players choose strategies and get payoffs. Chance is not a player!
In games of chance, uncertainty is probabilistic, random, subject to statistical regularities.
In games of strategy, uncertainty is not random; rather it results from the choice of another strategic actor.
Thus, game theory is to games of strategy as probability theory is to games of chance.
ON PAYOFFS: profits; utils, risk neutral.

39. Games of Strategy Examples Roulette Chess, Poker Players 1 > 2
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Games of Strategy
Games of Chance Games of Strategy
Examples Roulette Chess, Poker
Players > 2
Uncertainty Random Strategic (non-random)
Probability theory Game theory
(Statistics)
Thus, game theory is to games of strategy as
probability theory is to games of chance.

40. The Strategic Way of Thinking
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The Strategic Way of Thinking
The parametrically rational actor treats his environment as a constant, whereas the strategically rational actor takes account of the fact that the environment is made up of other actors and that he is part of their environment, and that they know this, etc. In a community of parametrically rational actors each will believe that he is the only one whose behavior is variable, and that all others are parameters for his decision problem (Elster, 1979, p. 18).

41. The Strategic Way of Thinking
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The Strategic Way of Thinking
In the strategic or game-theoretic mode of interaction, each actor has to take account of the intentions of all other actors, including the fact that their intentions are based upon their expectations concerning his own (Elster, 1979, p. 18).

42. An Experiment A) Smallest Value of X 7 6 5 4 3 2 1
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An Experiment
A) Smallest Value of X
Your
Choice of X
Your Payoff = (Your Choice of X) (Your Choice of X - Smallest X)
(Source: Van Huyck, Battalio and Beil, 1990)

43. An Experiment A) Smallest Value of X 7 is the efficient choice
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An Experiment
A) Smallest Value of X
Your
Choice of X
7 is the efficient choice

44. An Experiment A) Smallest Value of X
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An Experiment
A) Smallest Value of X
Your
Choice of X
1 is the secure (or prudent) choice

45. An Experiment A) Smallest Value of X
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An Experiment
A) Smallest Value of X
Your
Choice of X
Multiple equilibria COORDINATION PROBLEM

46. An Experiment What happened when we played the game?
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An Experiment
What happened when we played the game?
What would happen if communication were permitted?
Is there a rational way to play?

47. Next Time
1/26 Von Neumann and the Bomb
Poundstone: