Rational Choice and Game Theory
For all the games - see the accompanying power point file which includes the
relevant lecture slides.
• Rationality: the ability to assess alternatives, and choose a policy which
leads to an outcome that offers maximum utility (with minimum cost).
• Preferences: Representation of the relative utility an actor derives from
various outcomes; can be measured ordinally or cardinally; most models of
rational choice focus on the order of preferences rather than their subjective
• Expected utility: What is the benefit that each actor is likely to gain by
adopting a certain strategy? For each action, determined by multiplying the
probability and the utility for each possible outcome. It is used to help rank
actors’ preferences over all outcomes in game theory.
• Game theory: modeling the interaction of decision-makers via strategic
games; allows each player to be affected by the expected actions of all
players. Each player tries to predict the next move of the other actors and
plan his/her best response to that move (mainly through backwards
• Nash equilibrium: a pair of strategies (an outcome) for which neither player
can unilaterally alter their strategy in order to improve his/her position.
Actors can improve their respective payoffs only if they can negotiate a
simultaneous change in both their strategies. A very stable outcome.
• Coordination game: typified by different, yet non-conflicting preferences.
Example: battle of the sexes. Possible solu