Session 5 - Nash equilibrium: bad fashion and bank runs
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We first define formally the new concept from last time: Nash equilibrium. Then we discuss why we might be interested in Nash equilibrium and how we might find Nash equilibrium in various games. As an example, we play a class investment game to illustrate that there can be many equilibria in social settings, and that societies can fail to coordinate at all or may coordinate on a bad equilibrium. We argue that coordination problems are common in the real world. Finally, we discuss why in such coordination problems--unlike in prisoners' dilemmas--simply communicating may be a remedy.
ECON 159: Game Theory
| Lecture 5 - Nash equilibrium: bad fashion and bank runs |
Overview:
We first define formally the new concept from last time: Nash equilibrium. Then we discuss why we might be interested in Nash equilibrium and how we might find Nash equilibrium in various games. As an example, we play a class investment game to illustrate that there can be many equilibria in social settings, and that societies can fail to coordinate at all or may coordinate on a bad equilibrium. We argue that coordination problems are common in the real world. Finally, we discuss why in such coordination problems--unlike in prisoners' dilemmas--simply communicating may be a remedy.
Reading assignment:
Strategies and Games: Theory And Practice. (Dutta): Chapter 5
Strategy: An Introduction to Game Theory. (Watson): Chapters 6-9
Thinking Strategically. (Dixit and Nalebuff): Chapter 3, Sections 4-6
Class lecture:
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