This course provides an introduction to strategic thinking and to powerful tools and approaches for managerial decision-making. We will apply game theory to solve management problems and to determine optimal courses of action for decision makers. In particular, the course will cover the fundamentals of game-theoretical analysis as it applies to managerial decision-making problems. Game Theory is a structured way of analyzing strategic interactive situations. It is basic to the understanding of market competition among large firms, the designing of incentive contracts, bidding at auctions, bargaining, and other similar problems central to economics and business.
This course builds on course 5708 Strategic Thinking and Analysis I and will focus on games with incomplete/imperfect information, and cover topics and strategic problems like signaling and cheap talk, herding, and information cascades, reputation, private value auctions, and common value auctions.
On successful completion of the course, you should be able to:
- demonstrate a basic understanding of game theoretical tools and solution concepts,
- analyze strategic managerial decision situations and the incentives of actors therein, and to derive predictions about likely economic behavior,
- evaluate and analyze data of actual decisions made in strategic situations, and derive conclusions,
- present and discuss findings from that strategic analysis and evaluation of actual decisions, and
- work collaboratively to complete a task.
In this course we expect students to attend all classes.
Through making decisions in classroom experiments, at the end of each meeting, you will experience many different managerial decision situations first hand. This trains your empathy, strategic thinking, and social interaction skills.
After the lecture, descriptions of the situations (experimental instructions), anonymized data sets containing the decisions of participants, and a number of questions on each experiment will be posted online. The questions guide you in the analysis of the situations and data. Analyzing the situations and your own decisions with formal and informal tools lets you practice logical thinking, sharpens your economic intuition, and improves your knowledge about managerial and economic behavior. Analysis can be done individually or in groups of up to 3 people.
At the beginning of each class, a number of students will be (more or less randomly) selected to present their analysis. Presentations are individual (and individually marked), each student is expected to be able to present on each question. Presenting your results in class improves your structuring and communication skills.
Presentations are followed by (moderated) group discussions involving all students in class. You will learn from each other and train your argumentation and discussion skills.
Necessary game theoretical background will be provided to you in lecture form. Lecture slides will be posted online after class. Understanding the economic theory will give you more insight into strategic behavior, and improve your analytical skills.
Assignments, oral presentations and participation in group discussions (30%)
Assignments will be given in each class. At the beginning of each class, several students will be asked to analyze the strategic situations they experienced at the end of the last class, and to discuss the actual behavior of students based on collected decision data. This is followed by a group discussion. Marking is done continuously based on content and style of presentation and discussion.
Additionally, students can earn extra points by writing blog posts after class on real-world examples of the discussed strategic situations.
Written assignments (2 x 10%)
Two assignments will be marked in written form. This will be announced by the lecturer when giving out the assignment.
Final exam (50%)
The final exam will cover the entire course. The exam will include some questions which test pure knowledge, and other questions which will require students to apply knowledge to new situations, very similar to the regular homework assignments. In particular, students will be provided with a description of a strategic situation, and a summary of decision data collected in an experiment on this situation. Students will be asked to summarize the essential strategic properties of the situation, to describe the individual incentives of players, to make predictions about behavior based on justified assumptions, to compare those predictions with the decision data and to discuss potential discrepancies. Marking in the final exam will be based on proficiency in applying game-theoretic tools, as well as logic and justification of arguments.
Resources available to students consist of:
- Classroom experiment instructions – will be provided in each class
- Collected decision data – will be provided online after experiments
- Lecture slides – will be provided online after class
There is no prescribed/required textbook, because pricing for textbooks is outrageous and all the necessary information can also be found online in various forms. However, the textbook that comes closest to this course in terms of content and level is:
Avinash K. Dixit, Susan Skeath, and David Reiley, Games of Strategy. 3rd edition. W.W. Norton and Company, 2010. http://www.amazon.com/dp/0393117510/ You can use any version of this textbook. The paperback of the 3rd edition seems to be currently the cheapest.
Other suggested books include:
- Charles A. Holt: Market, Games & Strategic Behavior. Addison Wesley, 2006. http://www.amazon.com/dp/0321419316/
- Avinash K. Dixit and Barry J. Nalebuff: Thinking Strategically: The Competitive Edge in Business, Politics, and Everyday Life. W. W. Norton & Company, 1993. http://www.amazon.com/dp/0393310353/
- Adam C. Brandenburger and Barry J. Nalebuff: Co-Opetition : A Revolution Mindset That Combines Competition and Cooperation : The Game Theory Strategy That's Changing the Game of Business. Doubleday Business, 1994. http://www.amazon.com/dp/0385479506/
- Tim Harford: The Undercover Economist: Exposing Why the Rich Are Rich, the Poor Are Poor--and Why You Can Never Buy a Decent Used Car! Random House, 2007. http://www.amazon.com/dp/0345494016/