Assigned Reading: The Art of Strategy, by Dixit and Nalebuff
From the instructor…
“Please answer the following questions and upload your responses in the dropbox folder, Art of Strategy Question Responses. However, I encourage you to start early. While the book is meant to be fun and a relatively painless introduction to game theory and strategic thinking, it is still about 300 pages I am asking you to read. Also, reading this book prior to or concurrent with the textbook chapters may be helpful for the homework, particularly for Chapter 12.
In responding to the questions, please be concise. The primary purpose of the questions is to ensure that you have read the chapters. Rarely will the answer to a question require more than a few sentences, and sometimes just a couple words or numbers. All answers to the questions are directly provided within the book chapters, or require a small extension from something directly discussed.”
Reading Response Questions:
1. If a Prisoner’s dilemma game is repeated exactly 100 times, what does game theory predict will happen?
2. In general, what is a “tragedy of the commons”?
1. What is the definition of a Nash equilibrium?
2. This chapter provides several examples of coordination games. Here is another: You and another person separately (and privately, with no communication) pick an integer between 1 and 10. If you pick the same number, you both win a prize. If you pick different numbers, you win nothing. How many Nash equilibria are there in this game, and what are they?
3. What is a dominant strategy? What is a dominated strategy?
4. Briefly describe John Manard Keynes’ metaphor for the stock market.
5. Bonus: Pick a number between 0 and 100. Your goal is to pick a number that is closest to half of the average chosen number of the entire class. If you are among the closest 5 people, 2 points will be added to your lowest (non-dropped) exam score.
1. What rule of thumb does the book suggest is useful for determining whether randomness is needed in a constant-sum game?
2. In general, how does a player determine the appropriate mix (probabilities) of their pure strategies?
3. If a person is asked to write down a “random” sequence of coin tosses, how would the sequence tend to deviate from a likely true random sequence?
4. How can randomized strategies be used to motivate compliance at a lower monitoring cost?
5. The chapter provides an example of a penalty kick situation in soccer, where the goalie practices and improves his skill at saving penalties struck to the natural (right) side. How does this affect his mixture probability of attempting saves on the right side? Why is this the case?
1. How do the authors suggest one might win at the game of chicken?
2. What are the differences between a commitment, a threat and a promise?
3. How might B.B Lean aggressively threaten Rainbow’s End to deter it from initiating any price cuts? How is their threat made credible?
4. How can “salami tactics” be used to defeat a threat?
5. What is the basic idea of brinkmanship?
1. What are the two main avenues through which an individual or firm can add credibility to their threat, promise, or commitment?
2. How might the Mafia serve to change the payoffs (and outcome) of two criminals engaged in the Prisoner’s dilemma?
3. Why did Cortes have his ships burned upon arriving to face an army that vastly outnumbered his?
4. In Dr. Strangelove, when asked about the possibility of a device (the Doomsday Machine) being able to trigger itself automatically, what did Dr. Strangelove mean with his reply, “It is not only possible – it is essential”?
5. How might forcing college bookstores to buy back used textbooks make students, faculty and publishers worse off?
1. What is signaling? What is necessary for a signal to be effective?
2. If education has a large signaling role, does this help or hurt Bernie Sanders’ case for free college for all?
3. What is the information asymmetry in the insurance market? How does this lead to “adverse selection”?
4. What is one reason the authors offer as to why an MBA might be especially valuable for women?
5. Answer (briefly) the “A Trip to the Bar” question.
6. Why did IBM intentionally slow down the speed of one of its printers?
1. What is a BATNA?
2. In the airfare example, suppose the one-way airfares were instead:
Using the authors approach, when both firms are equally patient, what would be the amount paid by each of the firms?
3. Is the strategy of brinkmanship a weapon for the stronger or the weaker of the two parties in a negotiation?
4. What is a virtual strike, and why might workers work harder during one?
1. Chapter 8 discussed adverse selection, resulting from asymmetric information in the characteristics of a product or person. How does moral hazard, another type of asymmetric information problem, differ from this?
2. What is the reasoning for offering a compensation scheme that includes a flat sum plus a bonus on the basis of output (as opposed to either just a flat sum or paying strictly on the basis of the worker’s output)?
3. What is the idea of an efficiency wage?
4. As compared to paying a bonus based on a worker’s observed performance, what is the benefit of paying workers on the basis of relative performance?