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- 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

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