ECN 340 Lecture Notes - Lecture 8: John Von Neumann, Rationality, Headache
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
• Hua eigs ill tr to atiipate oe aother’s desires ad strategies, tr to respod
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 Neua alled it gae theor eause 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 – ostraits also alled the rules of the gae
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.