1. Art and Diseño

Last Updated: January 30, 2015
API-303
Game Theory and Strategic Decisions
Course syllabus
Spring 2015
Faculty: Janina Matuszeski
Email: [email protected]
Office: L208
Phone: 617-495-3561
Faculty Assistant: Sarah McLain
Email: [email protected]
Office: 124 Mt. Auburn - Suite 200N-217A
Teaching Fellow: Alice Heath
Email: [email protected]
Office Hours: TBD
Course Assistant: Jason Peuquet
Email: [email protected]
Office Hours: TBD
Weekly Schedule
Lecture (L130)
Monday
Tuesday
11:40am – 1pm
Thursday 11:40am – 1pm
Friday
* Or by appointment
Section (LAND)
Prof.
Matuszeski*
Office Hours
TF
CA
3-4pm
11:40am – 1pm
1-3pm
Course Description: This course uses game theory to study incentives and strategic behavior in practical
situations of inter-dependent decision making and negotiations. The course will develop basic
theoretical concepts in tandem with applications from a variety of areas, including bargaining,
competition, and strategic voting.
Grading: The class grade will be based on the following criteria:
20% - Problem Sets
20% - Midterm (in class)
30% - Group assignment: presentation and paper
30% - Final exam
REQUIRED ATTENDANCE DATES
This course includes mandatory attendance on Friday, April 3. Attendance is ALSO required for all
students during the week of group presentations (Tuesday, April 28 and Thursday, April 30) and the final
exam (9am-noon on Thursday, May 7). DO NOT take this course if you cannot commit to attend on
April 3, 28 and 30 from 11:40am to 1pm and May 7 from 9am to noon.
Last Updated: January 30, 2015
Prerequisites: There are no formal prerequisites. The course is designed to be accessible to all Kennedy
School students, regardless of mathematical background. The lectures emphasize conceptual rather
than technical material, however, additional technical material will be provided as optional readings.
Books
Required textbook:
 Avinash Dixit, Susan Skeath, and David H. Reiley, Jr. Games of Strategy. 3rd Edition. Norton.
2009
Recommended books:
There will be some readings from these books and they are generally useful books to have. These
may be purchased at the COOP. However, you are not required to purchase these books. Any
readings from these will be available either through OCM or HKS library reserves.
 Avinash K. Dixit and Barry J. Nalebuff. The Art of Strategy. Norton. 2008. [An accessible book,
with lots of great real-life examples. 2010 edition available at HKS reserves – readings
available on course page.]
 David Kreps. Game Theory and Economic Modeling. Oxford/Clarendon, 1990. [Short,
relatively clear chapters. A good complement to the main textbook. 3 copies available at HKS
reserves and online reproduction available through HOLLIS – readings available on course
page]
Other books:
These books are more advanced or on specialty topics. Required readings from these will be rare and
will be available either through OCM or HKS library reserves. All of these books are available via HKS
reserves (except for possibly Morrow).
 Roy Gardner. Games for Business and Economics. Wiley. 1995. [This has lots of interesting
real life topics. It focuses on how to set up the game, not just how to solve it. But, the
organization of the book is not very clear. Written at an advanced level for some topics. 2
copies available at HKS reserves – readings available on course page.]
 John McMillan. Games, Strategies, and Managers. Oxford University Press. 1996. [Focuses on
real-world applications. Written at an advanced level. 3 copies available at HKS reserves –
readings available on course page.]
 James D. Morrow. Game Theory for Political Scientists. Princeton University Press. 1994. [A
focus on political examples. 1 copy available at HKS reserves.]
 Howard Raiffa. The Art and Science of Negotiation. Harvard University Press. 1982. [4 copies
available at HKS reserves.]
 Thomas Schelling. Micromotives and Macrobehavior. Norton. 1978 (Rev Ed 2006). [A classic
text. Not always politically correct, but with very interesting, in-depth, real-world examples.
Written at an advanced level. 1 copy available at HKS reserves – readings available on course
page.]
 Thomas Schelling. The Strategy of Conflict. Harvard University Press. 1960 (Reprinted1980).
[Ditto. 4 copies available at HKS reserves – readings available on course page]
 Robert Axelrod, Robert M. The Evolution of Cooperation. BasicPerseus Books, Rev. Ed 2006.
[There is one advanced reading from this book but it is NOT available on the course page. 1
copy available at HKS reserves.]
Last Updated: January 30, 2015
Requirements
Readings: Required readings are marked with an [R]. These are often short, topical articles from the
popular press. Textbook readings are marked with [T]. ALL students are expected to do the Required [R]
and Textbook [T] readings BEFORE class. Advanced readings are marked with an [A] and are strongly
encouraged for all students, particularly those with a stronger economics or quantitative background.
These readings contain important and innovative ideas that may or may not be covered in other parts of
the course. Advanced readings are not required. Not every class has every kind of reading.
Group Project: The student group project will require you to apply game theoretical concepts to an area
of your special interest, e.g. business, politics, or society. Students will be assigned to teams of 2-3
students, based on stated mutual interests. At the end of the semester, each team will make a short
presentation of the issue during class and will submit a joint 5-page paper. The student group project
will count for 30% of your grade. When submitting the paper, teams may choose to state that everyone
contributed jointly to the assignment or to list the individual contributions of each team member.
Individual, confidential surveys mid-way through the group work will allow students to share successes
and challenges of the group project with the faculty member.
Problem Sets: There will be eight short problem sets, which will be graded. Problem sets count for 20%
of the grade (2.5% each). Small groups of students—no more than four—are encouraged to work
together on the problem sets. Problem solutions must be written independently by each of the students
in the small group and must indicate the names of the students in the group. All problem sets are due at
class time. Answers to the problem sets will be posted on the class web site shortly after they are turned
in. Problem sets turned in after the class time on the due date will not receive any credit.
Problem Set and Assignment Due Dates:
Date
Thursday, February 5
Thursday, February 12
Tuesday, February 17
Tuesday, February 24
Tuesday, March 3
Tuesday, March 10
Thursday, March 12
Thursday, March 24
Thursday, April 2
Thursday, April 9
Thursday, April 16
Tuesday, April 28 & Thursday, April 30
Thursday, May 7
Tuesday, May 12
Assignment(s) Due
Problem Set 1
Group project - Areas of interest form
Problem Set 2
Group project - Teams announced
Problem Set 3
Problem Set 4
Group project – Problem area description
Problem Set 5
MIDTERM
Problem Set 6
Problem Set 7
Group project – Draft game due
Problem Set 8
Group project – Presentations in class
Final exam
Group project – Final 5 page paper
Last Updated: January 30, 2015
Course page software pilot:
This course has been selected to participate in a pilot of new course page software, Canvas. The
software will allow for accurate tracking of class participation and attendance, submission of
assignments, and several class discussions. A class discussion on the course page will be an
ongoing place for students to post what is and what is not working about the new system. Your
participation and feedback about Canvas as a tool will help with the HKS-wide roll-out of the
software in Fall 2015. And you will all already be experts!
Options for more advanced students
This course attracts talented students with a range of background in game theory and quantitative
subjects. Some students have no prior exposure to game theory and/or quantitative topics while others
have extensive prior experience. All students bring valuable real world and academic experience to the
course and all are welcome.
ADVANCED PROBLEM SETS
To aid in helping students tailor the class to be most useful to them, each student will decide in the first
week whether they will complete the Advanced problem on each of the first five problem sets. (Problem
Sets 6-8 will not have an Advanced question.) Students with a stronger economics or quantitative
background are encouraged to choose this option, but it is not required. If a student decides to commit
to do these five Advanced problems, he or she will be graded based on their performance including that
Advance problem, for the first five problem sets. Between the second and third problem set, students
may ask the faculty member to switch either into or out of doing the Advanced problems.
READINGS
Students looking for additional challenges in this course can also choose to do many of the advanced
readings. Questions or thoughts about these readings can be addressed in class or in office hours.
Note on source of teaching materials: The design of this course including readings and lecture slides is
attributable to Dr. Pinar Doğan who taught this course for many years. I am grateful.
Last Updated: January 30, 2015
Detailed Schedule and Readings (Tentative)
“DSR” is Dixit, Skeath and Reiley (2009)
All readings aside from the DSR textbook are available online via the course page (Exceptions: Mar 10
“Burning the boats…” will be a paper handout; the Feb 18 Axelrod reading is available at HKS reserves.)
Thursday, January 29: Introduction and Foundations of Game Theory
[T] DSR, Chapters 1 and 2.
[R] "War games." The Economist. 15 October 2005. p. 82.
[A] Kreps, Chapters 1 and 2 in Game Theory and Economic Modelling. [A readings for today give
other perspectives and framing for game theory.]
[A] Tucker, Joshua. "Lebron, Make Up Your Mind Quickly." Washington Post. 8 July 2014.
Tuesday, February 3: Prisoners’ Dilemma and its Applications; Intro to Nash
Equilbrium
[T] DSR, Chapter 4, Section 4.3.
[R] "The Malls Get Decked: Retailers Minding Too Many Stores." The Street.com. 22 November 2000.
[R] "Why We’re So Nice: We’re Wired to Cooperate." The New York Times. 23 July 2002.
[A] Kreps, Chapter 3 in Game Theory and Economic Modelling. (especially pg 9-13, 26-28)
Thursday, February 5: Pure Strategy Nash Equilibrium; Multiple Nash Equilibria
and Equilibrium Selection
[T] DSR, Chapter 4, Sections 4.1, 4.2, 4.4, 4.6, 4.7 and 4.8
[R] "Amazon and the state of Illinois play a game of chicken over online tax collection."
mindyourdecisions.com
[A] DSR, Chapter 5, Sections 5.1 and 5.2 [A discussion of continuous strategies, plus real world
evidence on Nash Equilibria]
[A] Munro et al. "ATM Banking + Game Theory = Profits." A.T. Kearney Report. [A straightforward
article on another application of game theory.]
Last Updated: January 30, 2015
Tuesday, February 10: Prisoner’s Dilemma Simulation
Materials TBD
Monday, February 9 and Thursday, February 12: Min-Max and Mixed
Strategies
[T] DSR, Chapter 7, Sections 7.1, 7.2, 7.3, 7.4, 7.6, 7.7 (except 7.2.C); Chapter 4, Section 4.5
[R] "Game Theory for Swingers: What states should the candidates visit before Election Day?"
Slate. 25 October 2004.
[R] "Rock, Paper, Payoff: Child’s Play Wins Auction House an Art Sale." The New York Times.
29 April 2005.
[R] "World Cup Game Theory." Slate. 24 June 2006.
[A] "The Art of the Save. for Goalie and Investor." The New York Times. 1 March 2008. [More subtle
analysis of penalty kicks than the [R] reading.]
[A] Gardner. "Mixed Strategies and Bluffing: Liar’s Poker." Section 3.3 in Games for Business and
Economics. pp. 74-78. [Excellent example of mixing strategies, using a very simple poker game.]
[A] DSR, Chapter 7, Section 7.5 [A big picture discussion of some aspects of mixed strategies. Short.]
Tuesday, February 17: Repeated Games
[T] DSR, Chapter 11, Sections 11.1-11.3
[A] Axelrod. The Evolution of Cooperation. Perseus Books (Rev Ed 2006). Chapters 1-4.
3-87. (Only available on reserve)
Thursday, February 19: Collection Action and Collective Inaction Games
[T] DSR, Chapter 12. [Heavier going than other assigned textbook readings. Take your time and take
in what you can.]
[R] Schelling. "Thermostats, Lemons, and Other Families of Models." Chapter 3 in Micromotives
and Macrobehavior. 83-133. [Very entertaining and insightful, although the language is dated This
gives the general motivation for today’s lecture..]
Last Updated: January 30, 2015
[A] Schelling. “Hockey Helmets, Daylight Saving, and Other Binary Choices.” Chapter 7 in
Micromotives and Macrobehavior. 213-243. [An in-depth look at binary choice games with more
than two people. This is heavier on theory, but do-able.]
Tuesday, February 24: Special Lecture on Elinor Ostrom’s Contributions to
Collective (In)Action Problems
[R] Ostrom. "Collective Action and the Evolution of Social Norms.” Journal of Economic Perspectives.
2000. Vol. 14(3). 137-158. [JEP articles are a great resource for overviews of the current state of a
field, in this case research on collective action.]
[R] Elster. "Social Norms and Economic Theory." Journal of Economic Perspectives. 1989. Vol.
(3)4. 99-117. [This article is long but it is relatively straightforward, contains important content and is
worth reading carefully.]
[A] Ostrom. "A Behavioral Approach to the Rational Choice Theory of Collective Action: Presidential
Address. American Political Science Association. 1997." The American Political Science Review. 1998.
Vol. 92(1) (Mar., 1998). 1-22.
Thursday, February 26: Sequential-Move Games
[T] DSR, Chapter 3
Tuesday, March 3: Simultaneous and Sequential-Moves Combined: Subgame
Perfect Nash Equilibrium (SPNE)
[T] DSR, Chapter 6
Thursday, March 5: Subgame Perfection and Strategic Moves
[T] DSR, Chapter 10.
[R] "When It Can Be Good to Burn Your Boats." Financial Times. 25 October 1999. (Available as a
handout)
Tuesday, March 10: Application of SPNE to Bargaining
[T] DSR, Chapter 18, Sections 18.3-18.5.
[A] Roth et al. “Bargaining and Market Behavior in Jerusalem, Ljubljana, Pittsburgh, and Tokyo.”
American Economic Review. 1991. Vol. 81(5). 1068-1095. [Strongly recommended that you read this.
It’s very interesting information about the realities of bargaining and how culture plays a role.]
Last Updated: January 30, 2015
Thursday, March 12: Midterm (on material up through and including Feb 24)
Tuesday, March 17, Thursday, March 19: Spring Break (no classes)
Feel free to do reading for Tuesday, March 31 in advance. There are a lot of required readings for
this class so it’s too much to do the night before class. They are all relatively straightforward, rich in
ideas, and of great relevance for public policy.
Tuesday, March 24: Introduction to Games with Incomplete Information
[T] DSR, Chapter 9, Section 9.2.
[A] Logren, Persson and Weibull. "Markets with Asymmetric Information: The Contributions of
George Akerlof, Michael Spence and Joseph Stiglitz." Scandinavian Journal of Economics. 2002. Vol.
104(2). 195-211.
Thursday, March 26: NO CLASS
Tuesday, March 31: Moral Hazard and Adverse Selection
[T] DSR, Chapter 9, Sections 9 (intro pages), 9.4.A.
NOTE to students: There are a lot of required readings for this class, but they are all relatively
straightforward, rich in ideas, and of great relevance for public policy. In spite of the number, you are
expected to have completed all of these readings before class. Three are short (including the textbook
reading) and the final R reading is longer.
[R] "The moral-hazard myth." The New Yorker. 29 August 2005.
[R] "Writing off tyrants’ debt is a principle that should be extended to even poorer nations." The
Guardian. 21 April 2003.
[R] McMillan. "Creating Incentives" and "Designing Contracts." Chapters 8 and 9 in Games,
Strategies, and Managers.
[A] Gneezy, Meier, and Rey-Biel. "When and Why Incentives (Don’t) Work to Modify Behavior."
Journal of Economic Perspectives. 2011. Vol. 25(4). 191—210. [A fantastic article, considering the
psychology side of incentives, so it’s a more nuanced view than the basic principle-agent model.]
Thursday, April 2 and Friday, April 3: Signaling games
[T] DSR, Chapter 9, Sections 9.4.B, 9.5, and 9.6.
[R] Dixit and Nalebuff. Chapter 8 in The Art of Strategy. [This is a great chapter with lots of great
stories and examples and little math. I recommend reading it if you have time.]
Last Updated: January 30, 2015
Tuesday, April 7: Cheap Talk
[T] DSR, Section 9.3.
[A] Farrell and Rabin. “Cheap Talk.” Journal of Economic Perspectives. 1996. Vol. 10(3).
103-118.
Thursday, April 9 and Tuesday, April 14: Auctions
[T] DSR. Chapter 17.
[R] "The Agony of Victory: Online Auctions and the Winner’s Curse." Slate. 19 March 1999.
[R] McMillan. "Bidding in Competition" and "Bidding in Olympic Competition." Chapters 11
and 12 in Games, Strategies, and Managers. 133-159.
[R] "Economic focus: Bidding adieu?" The Economist. 29 June 2002.
[A] McMillan. "Selling Spectrum Rights." Journal of Economic Perspectives. 1994. Vol. 8(3). 145-62.
Thursday, April 16 and Tuesday, April 21: Strategy and Voting
[T] DSR, Chapter 16.
[A] Shepsle and Bonchek. "Strategic Behavior" and "Voting Methods and Electoral Systems."
Chapters 6 and 7 in Analyzing Politics. Norton 1997. 137-191.
Thursday, April 23: Cooperative Game Theory and the Core
Readings TBD
Tuesday, April 28: Presentation of group projects I
Thursday, April 30: Presentation of group projects II
Thursday, April 30 - evening: Optional Lecture on Behavioral Game Theory
Thursday, May 7: Final Exam (9am-noon)
Tuesday, May 12: Group Assignment Final Paper due at 11:55pm