• Like
EC4004 Lecture 6 Risk and Game Theory
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

EC4004 Lecture 6 Risk and Game Theory

  • 2,623 views
Published

 

  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Be the first to comment
No Downloads

Views

Total Views
2,623
On SlideShare
0
From Embeds
0
Number of Embeds
0

Actions

Shares
Downloads
177
Comments
0
Likes
1

Embeds 0

No embeds

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
    No notes for slide

Transcript

  • 1. EC4004 Lecture 6 Probability and Game Theory Dr Stephen Kinsella
  • 2. A Panda is for life. Not Just for The Debs.
  • 3. Today
  • 4. 1. Risk
  • 5. 2. Insurance
  • 6. 3. Game Theory
  • 7. Yesterday
  • 8. 1. Risk
  • 9. 4 Ideas:
  • 10. 1. Probability: Average Frequency of events
  • 11. 2. Expected value of game with a number of uncertain outcomes: size of prize player will win on average.
  • 12. 3. Fair games are games that cost precisely their expected value.
  • 13. 4. Risk aversion is tendency for people to refuse to accept fair games.
  • 14. Combine 4 ideas with Diminishing Marginal Utility to get:
  • 15. Utility U 0 20 30 33 35 40 50 Income (thousands of euros)
  • 16. Utility U 0 20 30 33 35 40 50 Income (thousands of euros) Here’s a person a person with three options. Contender may: 1. retain current income level (€35,000) without taking any risk; 2. take a fair bet with a 50-50 chance of winning or losing €5,000; 3. take a fair bet with a a 50-50 chance of winning or losing €15,000.
  • 17. 2. Insurance
  • 18. Utility U U1 Income 0 20 25 35 (thousands of euros)
  • 19. Utility U U1 Income 0 20 25 35 (thousands of euros) Assume that during next year a person with €10,000 current income faces a 50 percent chance of incurring €4,000 in unexpected medical bills. Without insurance, the person’s utility would be U1, - i.e. the utility of the average of €6000 and €10,000.
  • 20. 3. Game Theory
  • 21. Study of Strategic Interaction
  • 22. Study of Strategic Interaction
  • 23. 3 Components to Any Game
  • 24. 1. Players
  • 25. 2. Payoffs
  • 26. 3. Strategies
  • 27. Equilibrium
  • 28. A Nash equilibrium is a set of strategies, one for each player, that are each best responses against one another.
  • 29. In a two-player games, a Nash equilibrium is a pair of strategies (a*,b*) such that a* is an optimal strategy for A against b* and b* is an optimal strategy for B against A*.
  • 30. A Beautiful Mind
  • 31. Next Time: More Game Theory Iterated Prisoners Dilemma Try 6.1, 6.3, 6.5
  • 32. EC4004 Lecture 6 Probability and Game Theory Dr Stephen Kinsella