Monday, January 30, 2012

Class #3 Highlights


In class # 3, we talked about rationality. While caricatures of economics and game theory posit that rationality is the same thing as maximizing money, the reality is more nuanced. One needs to pay attention to non-pecuniary factors like fairness, identity, pride, altruism, spite, and so forth. The tools of game theory are flexible enough to handle these sorts of additions. Indeed, the art of successful "mind reading" is getting the game right in the sense of including all relevant factors determining a rival's payoffs.

We also talked about the fundamental rule of game theory: look forward, reason back. Through this rule, we discovered that the competition among teams for a player in the presence of a right of first refusal option was largely illusory. We also discovered that a press release designed to deter entry can only be successful to the extent that the threats and promises offered are credible.

Side notes: Results from McCain are due by midnight of 1/30/12. Also, I've fixed the calendar entries in the syllabus.

Wednesday, January 25, 2012

Class #1 and 2 Highlights


As I mentioned at the outset: The goal of this course is to change your mindset, to provide you with a new and useful lens through which to view the world. The shorthand for this is inside versus outside thinking. Inside thinking focuses on how to make optimizing decisions when faced with either a static setting or environmental risks. For instance, in marketing you identify the willingness to pay of key customer segments and then choose optimal prices for each.

Outside thinking deals with strategic risk--there are other players in the game besides yourself. These players have goals, ambitions, and strategies, and it is important to factor these in when making decisions. The metaphor for outside thinking is a chessboard. The "best" space on a chessboard depends on where all the other pieces are and, perhaps more importantly, depends on the anticipated moves by the other player.

We illustrated the difference through the Race for the GOP Nomination game. In that game, inside thinking assumed that all other players simply chose the candidate corresponding to the signal received and then optimized. Viewed in this light, later voters are very likely to make the correct decision since they have lots of data on which to base that decision. Outside thinking paid attention to the incentives of earlier voters to vote strategically, i.e. to vote against their own signal. Using outside thinking, we discovered that the primary race is very likely to produce a "cascade"---a run of decisions all favoring a single candidate. Indeed, we saw this behavior in the experiment as well. The key implication is that later voters do not have much data on which to base their decision and, in fact, information is not collected by voting in this fashion.

Why is this important? Under inside thinking, you would (correctly) conclude that voting sequentially is likely to produce the correct choice given enough voters. With outside thinking, you would realize that there is a serious strategic problem with sequential voting. It is quite likely to produce the wrong answer. In our setting, there was a 20% chance that voting would produce the wrong answer even if we had an infinite number of voters.

We might then compare this to another common system--everyone voting at the same time. In our game, this would produce the correct answer always. Indeed, using game theory, we can discover that there is a general result that if all voters have reasonably similar incentives (like choosing the more electable candidate in the primary), then a national primary will choose the correct voter with certainty as the number of voters gets large. Thus, by using outside thinking, we learn that there is a right way and a wrong way to use voting to make good decisions. Since voting is a common way to make decisions in business settings as well as political settings, this is quite important in developing effective ways of having your company make decisions.

Game Theory Teams

In the huddle
Building a Team
Here is the incomplete list of team members from emails received to date. If you are not on the list, please send me an email with your team members and team name.

Game Theory Teams                                                                                                Spring 2012
Gameblers: Maria Alejandra Gonzalez, Alper Batur, ismael ghozael, Fabio Povoa, Mohamed Shommo
Latin Gambits: Paul Kisiliuk, Rodrigo Donoso, Andres Pachano, Matias Bebin, Inaki (Jose Ignacio) Ruiz
Good Swimmers: Alden Woodrow, Patrick Flemming, Laura Bentzien, Kyle Bentzien, Dana Ledyard.
Pokerface: Gustavo Ribeiro, Jasmine Hellings, Javier Figueroa, Juan Manuel de los Rios Wakeham, Shannon Riley
Nash-ty equilibrium: Gene Boyle, Eamonn Courtney, Billy Hwan, Ella Yanai, Janice Yuen
4 Young Men: Aditya, Archit, German, Sue, Darren, 
SwimSocks: Caroline Mock, Oscar Salinas, Sam Mathias, Sam Wiggin, Patrick Mar
Beautiful Minds: Alex Chou, James Cook, Pei-fu Hsieh, Patrick Schneider, Derek Simmons and Jenni Tonti.
YMCA²: Yoichi Katayama, Matthias Egler, Carlos Facanha, Alexandre Montoro, Aaron Tang

4 Men and a Baby Mama: Rahul Bijor, Brandon Yahn, Laura Andron, Josh Mogabgab, Andrew Hamilton
JM Hypnotherapist: Rafa, Iris, Jeff Williamson, Juan Sanchez Morales, Dave Lewis
Wysiwyg: Phil Dawsey, Adam Boscoe, Sam Filer, Abhishek Singhal

The Race for the GOP Nomination

Conquest of the Empire
Choosing the Right Move

From the Game Theory in the Wild files comes this piece on the Colbert Report spotted by your colleague Dave Lewis. The piece is about the book The Dictator's Handbook, written by the NYU game theorist Bruce Bueno de Mesquita. The piece talks about how the professor uses game theory in a computer model to predict geopolitical events. Here's a useful tool for applying these ideas: The Predictioneer's Game.

Key highlight from the interview: A prediction on the GOP nomination. Enjoy!

Tuesday, January 17, 2012

Welcome to Game Theory

White Knight

Welcome to the Spring 2012 edition of game theory. All of the assignments are available from the main game theory website. I'll use this blog to recap the key highlights from each class. It will also be used to make announcements about assignments and to offer takes on whatever I happen to be thinking of at the moment. You should check the blog regularly for announcements and results from the various games.

The blog is also an excuse to show off my photos. Unless otherwise credited, all the photos on the blog are done by me. Photography is a real passion of mine, and I especially enjoy sharing the images I create. Creativity is a major subtheme of the class.

I hope you enjoy the semester we'll have together!