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Lecture 3

# ECON 3M03 Lecture Notes - Lecture 3: Solved Game, Expected Utility Hypothesis, Utility

Department
Economics
Course Code
ECON 3M03
Professor
Olivia Mesta
Lecture
3

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Maria Gallego EC 325 - Games of Chance - Gardner Chapter 2
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GAMES OF CHANCE
Gardner Chapter 2
OUTLINE
Challenge chance posses to players of a game
A fair game
An unfair game
Attitude towards risk

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Maria Gallego EC 325 - Games of Chance - Gardner Chapter 2
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Chance played no role in the previous chapter.
In this chapter, we look at what happens in a game when chance does play a role.
The notion of payoff needs to be extended to that of expected payoff when there is
the chance factor.
Consider the following basic situation:
Player 1 faces a risky situation: win \$1 with probability 0.5, lose \$1 with
probability 0.5.
Player 0 will always represent chance in a game.
It does not receive payoffs
Its strategy is not decided in the way that a true player’s is.
Only player 1’s payoffs appear on the game tree.
Player 1 has payoffs but no strategy since she is in the mercy of chance.

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Maria Gallego EC 325 - Games of Chance - Gardner Chapter 2
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CHALLENGE CHANCE POSSES TO PLAYERS OF A GAME
Player 0 (also called Nature) determines
which outcome materializes
Use a tree diagram to graph
lottery
2/1,1\$;2/1,1\$L
win a \$1 with prob 1/2 or loose \$1 with prob 1/2
Nature is not a strategic player
Prob of outcome lies along branch of tree
P1 cannot choose, only P0 chooses
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