ECN 340 Lecture Notes - Lecture 7: John Von Neumann, Headache, Coordination Game
13 Dec 2016
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Chapter 2 (Harford) - Limits of Rational Choice Theory:
- Sometimes incentives (and disincentives) result not from the legal system or the
presence of the AIDS virus, but from the actions of other people: your spouse, your
boss, or you opponent at the card table
- Human beings will try to anticipate one another’s desires and strategies try to respond
to them and perhaps to thwart them
- To understand the complexities of these interactions, we need a special branch of
economics: game theory
- In the 1920s, one of the most brilliant man in the world, John Von Neumann, decided
to work out the correct way to play poker – which is the human game of secrets and
lies.
- Von Neumann called it ‘game theory’ because he reasoned that if you want a theory
to explain human interactions, you need a theory that can explain poker
- Von Neumann developed a rational explanation for such of life, and his theory would
eventually be applied to:
➢ The breakdown of diplomatic negotiations,
➢ The unexpected emergence of cooperation between enemies
➢ The possibilities of nuclear terrorism
➢ Even the hidden side of dating, love, and marriage – all based on strategies
- In poker, there is no straightforward connection between what a player bets and the
hand he holds.
Game theory:
- Game theory looks for strategies by opponents that are consistent
- Each person must make plans in light of the actions and expected reactions of their
rivals
- Basic concepts:
➢ Players
➢ Rules
➢ Strategies
➢ Payoffs
➢ Equilibrium
Game theory and Poker:
- What do you do if you have a terrible hand in a poker game? Should you fold or bet?
- The answer is surprising: folding would be unwise, because you (bad) hand will be
compared to you opponent and you will lose
- It actually makes more sense to bet with a bad hand, because the only way you will
win anything is if your opponent drops out; and the only way he might drop out is
if you make a bet.
- Perversely, you are better off betting with awful cards than with mediocre ones: this is
the quintessential (and rational) bluff.
Problems with Game Theory:
- 1. A ‘game’ may be so complex that even the fastest computer could not calculate the
perfect strategy and
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Document Summary
Chapter 2 (harford) - limits of rational choice theory: Sometimes incentives (and disincentives) result not from the legal system or the presence of the aids virus, but from the actions of other people: your spouse, your boss, or you opponent at the card table. Human beings will try to anticipate one another"s desires and strategies try to respond to them and perhaps to thwart them. To understand the complexities of these interactions, we need a special branch of economics: game theory. In the 1920s, one of the most brilliant man in the world, john von neumann, decided to work out the correct way to play poker which is the human game of secrets and lies. Von neumann called it game theory" because he reasoned that if you want a theory to explain human interactions, you need a theory that can explain poker. Von neumann developed a rational explanation for such of life, and his theory would eventually be applied to:
