An Introduction to Game Theory

“Game Theory”, or the science of strategy, is a big topic that leads in many fascinating directions. This post will provide a basic understanding of what Game Theory is, and how it can be utilised in management situations. In addition to providing my own course material, I have also attempted to tie into some of the amazing resources that already exist.

My advice for you is to watch this video, and then choose one (or more) of the additional readings.

 

Lecture handout: Game Theory*

Activity: Game Theory Worksheet and Obedient Prisoners

• Other good activities to accompany the Game Theory lecture include: Oligopoly Game 42 and “Cheating for a £20”.
• I like to follow the lecture on Game Theory with an interactive session on Oligopoly.

Here is a video on finding a Nash equilibrium:

Additional readings

Here are some recommendations, depending on your level of interest and time constraints:

• The Evolution of Trust is a brilliant website that allows you to play PD games and see alternate strategies
• A simple newspaper article is “Playing games with the planet“, The Economist, September 29th 2007.
• A short account of the ultimatum game is Poundstone, W., (2011) “Ultimatum Game” from Priceless: The Hidden Psychology of Value, One World.
• A nice chapter-length overview is presented in Chapter 2 of Ariel Rubinstein’s “Economics Fables” (Open Book, 2014).
• An academic approach to constructing analytic narratives is “Modeling Complex Historical Processes with Analytic Narratives” by Margaret Levi. This would be the first start to attempting to utilise Game Theory to tell corporate stories.
• A good book-length account is “The Prisoner’s Dilemma” by William Poundstone (Anchor, 1993)
• For a standard textbook get “Games of Strategy“. I use the Dixit, A., and Skeath, S., (Norton, 1999) edition. The latest is Dixit, A., and Skeath, S., and Reiley, D., (Norton, 2014, 4th ed.).
• A thorough online course is Strategic Game Theory for Managers, by Robert Marks. (Also see Game Theory and Business Strategy by Mike Shor).

But the Game Theorist’s “bible” is “Thinking Strategically” by Dixit, A., and Nalebuff, B (Norton, 1993). This is the one book you need to read, re-read, and master.

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• Here is my attempt to introduce some Game Theory into the classroom.
• Further reading: “Platform Business for Everything”, in Fisman, R., and Sullivan, T., The Inner Lives of Markets, John Murray Learning, p124-126
• Further reading: “Game Theory: A Beautiful Mind” Chapter 2 of Rubenstein, A.,  Economic Fables
• More resources: Axelrod’s Tournament, and RadioLab’s episode on Tit for Tat with forgiveness

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Finally, it is great fun to apply Game Theory to popular culture. See Michael Statsny’s discussion of game theory in movies, and a collection of popular cultural references. Here are some of my favourite discussion questions:

• Consider the bar scene from “A Beautiful Mind” – is it a Nash equilibrium?
  • See here.
• Consider the boat scene from “The Dark Knight” – is it a Prisoner’s Dilemma?
  • See here.

I also like these two classic clips from Goldenballs:

• Goldenballs 1 – what happens next?
• Goldenballs 2 – is this a rational strategy?

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Learning Objectives:

• Category: course map