🪩
Unit 4 - Social Interactions
🌍 SOCIAL DILEMMAS
📌 Definition
A situation where individual self-interest leads to a socially suboptimal outcome
E.g: Climate Change, Traffic Jams…
⚠️ Types of Social Dilemmas 🛠 Solutions
1. Tragedy of the Commons Laws (e.g. fines, taxes)
→ Overuse of Shared Resources
2. Free Riding Institutions
→ Benefit from others without Incentives
contributing
🎮 GAME THEORY BASICS
📌 KEY CONCEPTS
GAME STRATEGIC INTERACTION
Model of players’ strategic interactions. People are aware of how their actions affect both their own
and other’s outcomes.
STRATEGY OUTCOME
Choice that a player may take in a social interaction. Situation that results from the combination of strategies by
both players.
Unit 4 - Social Interactions 1
, THE INVISIBLE HAND
GAME
-1-
🖐️Invisible Hand Game
Outcome will always be OPTIMAL (⁂ Good for both)
Both Players will have equal outcome ratio’s.
MORE is always preferred to less
Look at it like a contingency table…
PLAYING THE GAME (Simple)
1. IF Bala chooses Rice AND Anil chooses Cassava
- Then the playoff is 4:4
WHY?
IF Bala chooses Rice, what is Anil’s best choice (Highest Nr)?
- Best = Cassava (Highest Nr - 4)
🔑 IMPORTANT CONCEPTS
Best Response Dominant Strategy
Best action that gives the highest PAYOFF, given the strategy the other Best action (With Highest Nr’s) no matter what the
person will play. other player does.
Dominant Strategy Equilibrium NASH EQUILIBRIUM
Outcome of a game where ALL players play their dominant strategy. No player can/want to improve their strategy - bcs
→ Not always the Optimal Option (Except in Invisible Hand Game) then the other player will have an advantage.
PLAYING THE GAME (Complex)
Anil’s Best Response:
Cassava ← ⁂ Cassava is Dominant
Cassava
Bala’s Best Response:
Rice
Rice ← ⁂ Rice is Dominant
💎 Dominant Strategy Equilibrium
⇒ (Cassava; Rice)
💎 Nash Equilibrium
⇒ (Cassava; Rice)
EXAM NOTE!
If they ask:
Dominant Strategy → Give the object/choice [e.g: Rice or Cassava]
Biggest Payoff → Give the number [e.g: 6]
Unit 4 - Social Interactions 2
Unit 4 - Social Interactions
🌍 SOCIAL DILEMMAS
📌 Definition
A situation where individual self-interest leads to a socially suboptimal outcome
E.g: Climate Change, Traffic Jams…
⚠️ Types of Social Dilemmas 🛠 Solutions
1. Tragedy of the Commons Laws (e.g. fines, taxes)
→ Overuse of Shared Resources
2. Free Riding Institutions
→ Benefit from others without Incentives
contributing
🎮 GAME THEORY BASICS
📌 KEY CONCEPTS
GAME STRATEGIC INTERACTION
Model of players’ strategic interactions. People are aware of how their actions affect both their own
and other’s outcomes.
STRATEGY OUTCOME
Choice that a player may take in a social interaction. Situation that results from the combination of strategies by
both players.
Unit 4 - Social Interactions 1
, THE INVISIBLE HAND
GAME
-1-
🖐️Invisible Hand Game
Outcome will always be OPTIMAL (⁂ Good for both)
Both Players will have equal outcome ratio’s.
MORE is always preferred to less
Look at it like a contingency table…
PLAYING THE GAME (Simple)
1. IF Bala chooses Rice AND Anil chooses Cassava
- Then the playoff is 4:4
WHY?
IF Bala chooses Rice, what is Anil’s best choice (Highest Nr)?
- Best = Cassava (Highest Nr - 4)
🔑 IMPORTANT CONCEPTS
Best Response Dominant Strategy
Best action that gives the highest PAYOFF, given the strategy the other Best action (With Highest Nr’s) no matter what the
person will play. other player does.
Dominant Strategy Equilibrium NASH EQUILIBRIUM
Outcome of a game where ALL players play their dominant strategy. No player can/want to improve their strategy - bcs
→ Not always the Optimal Option (Except in Invisible Hand Game) then the other player will have an advantage.
PLAYING THE GAME (Complex)
Anil’s Best Response:
Cassava ← ⁂ Cassava is Dominant
Cassava
Bala’s Best Response:
Rice
Rice ← ⁂ Rice is Dominant
💎 Dominant Strategy Equilibrium
⇒ (Cassava; Rice)
💎 Nash Equilibrium
⇒ (Cassava; Rice)
EXAM NOTE!
If they ask:
Dominant Strategy → Give the object/choice [e.g: Rice or Cassava]
Biggest Payoff → Give the number [e.g: 6]
Unit 4 - Social Interactions 2
