ECN 340 Lecture Notes - Lecture 8: John Von Neumann, Rationality, Headache

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Lecture 8: Chapter 2 Las Vegas The Edge of Reason
Limits of Rational Choice Theory
Sometimes incentives (and disincentives) result not from the legal system or the
presence of the AIDS virus, but from the actions of other people: your spouse, your
boss, or your opponent at the card table
Hua eigs ill tr to atiipate oe aother’s desires ad strategies, tr to respod
to them and perhaps to thwart them
To understand the complexities of these interactions, we need a special branch of
economics: game theory
In the 1920s, one of the most brilliant man in the world, John Von Neumann, decided to
work out the correct way to play poker - which is the human game of secrets and lies
Game Theory and Human Interactions
Vo Neua alled it gae theor eause he reasoned that if you want a theory to
explain human interactions, you need a theory that can explain poker
Von Neumann developed a rational explanation for much of life, and his theory would
eventually be applied in:
o The breakdown of diplomatic negotiations
o The unexpected emergence of cooperation between enemies
o The possibilities of nuclear terrorism
o Even the hidden side of dating, love, and marriage all based on strategies
In poker there is no straightforward connection between what a player bets and
Game Theory
Game theory looks for strategies by opponents that are consistent
Each person must make plans in light of the actions and expected reaction of their rivals
Basic concepts:
o Players the individuals
o Rules ostraits also alled the rules of the gae
o Strategies in choosing a strategy each will consider the likely response of
rivals
o Payoffs each player seeks the best possible outcome for himself/herself
Equilibrium no unique equilibrium (outcome) because it depends what rivals do
Game Theory and Poker
What do you do if you have a terrible hand in a poker game? Should you fold (dropout)
or bet?
The answer is surprising: folding would be unwise, because your (bad) hand will be
compared to your opponent and you will lose
It actually makes more sense to bet with a bad hand, because the only way you will win
anything is if your opponent drops out; and the only way he might drop out is if you
make a bet
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Document Summary

Lecture 8: chapter 2 las vegas the edge of reason. In the 1920s, one of the most brilliant man in the world, john von neumann, decided to work out the correct way to play poker - which is the human game of secrets and lies. In poker there is no straightforward connection between what a player bets and. Should you fold (dropout) or bet: the answer is surprising: folding would be unwise, because your (bad) hand will be compared to your opponent and you will lose. Application of game theory: one of the leading poker players today is a once doctoral student at the university of. Where and when do you meet this person given that you cannot communicate: schelling asked his class this question in ny: his students answered: meet the person at. 12 at the information booth at grand central station.

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