1. 01.25.01Lecture Notes in Game Theory1 Game Theory Applications: Lecture Notes Course Website http://www.citi.umich.edu/u/galka/games u Galina Albert Schwartz Galina Albert Schwartz u Department of Finance u University of Michigan University of Michigan u Business School Business School

2. 01.25.01Lecture Notes in Game Theory2 Summary of Lectures 4 & 5 (the beginning) u Sequential & Similtaneous Move Games: Dixit, chapters 3 & 4 u Extensive form games u Backward Induction [rollback methodology] u Pure & mixed strategies u Experiments in Strategy u Second mover advantage, Dixit, p. 57 [brothers or pirates?]

3. 01.25.01Lecture Notes in Game Theory3 Extensive Form Games u Gambit on the web Gambit on the web http://www.hss.caltech.edu/gambit/Gambit.html u Full information games [complete] u Game Tree = Extensive form game –initial node –decision node –terminal node

4. 01.25.01Lecture Notes in Game Theory4 Backward Induction u We assume –Complete information –Pure strategy u Strictly dominated strategies u Weakly dominated strategies u Best Response Action

5. 01.25.01Lecture Notes in Game Theory5 The Centipede Game –backward induction –rational or irrational? –What happens if the game is repeated?

6. 01.25.01Lecture Notes in Game Theory6 What is fair? u Examples –centipede game –divide a dollar game »`normal’ version & » dictator version u The notion of Social (cultural) norm

7. 01.25.01Lecture Notes in Game Theory7 Lewis, Ch 4: their games u Communications –norm –deviance u Gentle & Tough

8. 01.25.01Lecture Notes in Game Theory8 More Examples u Free Tea & Coffee for faculty – in Princeton –in UMBS u Why? u Greenspan –precise –wordy –then, why do we care at all?

9. 01.25.01Lecture Notes in Game Theory9 To Do: your preparation u To read: –Dixit, chapters 3 & 4 –Lewis, chapter 5 u Next time: More small examples of different types of games u Next time the absolutely necessary component? of the Greenspan’s strategy [and any other Central Banker’s strategy]