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Michael Olafusi

MIT: Game Theory for Managers

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You can register on MIT Opencourseware for Game Theory for Managers at https://ocw.mit.edu/courses/sloan-school-of-management/15-040-game-theory-for-managers-spring-2004/

About the course

People rarely make decisions in a vacuum. The choices we make affect others, and their choices impact us. Such situations are known as "games" and game-playing, while sounding whimsical, is serious business. Managers frequently play "games" both within the firm with other divisions and subordinates, etc. as well as outside the firm with competitors, customers, regulators, and even capital markets! The goal of this course is to enhance your ability to think strategically in complex, interactive environments. Knowledge of game theory will give you an advantage in such strategic settings.

The course is structured around three "themes for acquiring advantage in games":

  1. Commitment / Strategic Moves: Credibility, threats, and promises as ways to change the game being played.
     
  2. Exploiting Hidden Information: When to reveal information or not, including when to surprise an opponent. Adverse selection as a strategic force.
     
  3. Limited Rationality: How to play when others may not be fully rational, and when others are uncertain about your rationality.

Specific issues that arise in business strategy will act as motivation, but this is not a course about business tactics. For instance, you will not necessarily become a better trader or a better negotiator. Rather the goal is to provide you with a deeper understanding of key issues that arise in a wide variety of strategic situations.

As a core discipline of economics, game theory is applied in many other courses offered at Sloan. These applications are wide-ranging: games played between competing firms in 15.013 (Industrial Economics for Strategic Decisions); games played between firms and their suppliers and between managers and their employees in 15.903 (Corporate Strategy and Extended Enterprises); not to mention applications in negotiations, international macroeconomics, corporate finance, etc… A half-semester could never suffice to study even a fraction of these particular applications in any depth. Rather this course is designed to provide students with deeper intuitions and a framework for thinking about interactive strategic settings. While the course is designed to complement Sloan's other economics and strategy offerings, it is self-contained. There are no prerequisites beyond the Core economics course 15.010.

My view is that the important ideas of game theory are best mastered not at the level of some abstract theory but through the flesh and blood of real examples. For this reason, we will discuss numerous real-world examples and analyze games that arise in business settings. Indeed, an important element of the course is a team project in which students will identify a real-world game of interest, analyze it using the tools of the course, and offer concrete strategic advice to some player in the game.

In the same spirit, my goal is to teach game theory, not mathematics. Actually, students will discover a fascinating paradox: the more transparent the mathematics, the more interesting and challenging the issues that can arise. For example, in 15.010 we spent our time methodically calculating equilibrium in the Cournot oligopoly game by deriving reaction curves and so on, but there was nothing truly interesting at the superficial – though mathematical – level of that treatment. We will of course use reaction curves and such as tools but only ultimately to get to ideas that are mathematics-free. So when someone asks you a simple question without all of the equations and curves (say "Should we pursue a cost-reducing innovation that will ultimately lower both our costs and our competitors?") you will have a ready understanding of the key strategic issues involved.

Syllabus

LEC # TOPICS
1 Introduction (PDF)

Introduction to the course with examples.
2 Rationality? (PDF)

Irrational play by individuals and groups.

Implications of (ir)rationality on behavior in games, with and without dominant strategies.
3 Equilibrium I (PDF)

Some prototypical games.

Nash equilibrium in simultaneous-move games.

Mixed vs. pure strategies.

Equilibrium arising from evolution.
4 Equilibrium II (PDF)

More on evolution.

Games with sequential moves and subgame-perfect equilibria.
5 Commitment (PDF)

Strategic value of credible commitments.
6 Strategic Substitutes and Strategic Complements (PDF)

Moving first vs. moving last, when to capitalize on the element of surprise, and other applications of the ideas of strategic substitutes and strategic complements.
7 Application: Entering a Market (PDF)

Entry as commitment, and establishing barriers to entry.

Strategic exercise of real options.
8 Application: Brinksmanship (PDF)

Strategic escalation of threats.

Wars of attrition.
9 Auctions (PDF)

Variety of real-world phenomena that can be interpreted as auctions.

Auction theory: Winner's Curse given common values and Revenue Equivalence given independent private values.
10 Uncertainty and Information (PDF)

Strategic manipulation of risk.

Adverse selection and signaling/screening devices.

Agency and moral hazard.
11 Reputation and Strategic Irrationality (PDF)

Making threats and promises credible through reputation in repeated games.

Applications to entry deterrence and cooperation in the Prisoner's Dilemma.

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