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Lecture 3

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**preview**shows pages 1-3. to view the full**18 pages of the document.**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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