Week 7 Notes Econ
Week 7 Notes Econ FIN 501
Popular in Financial Economics
Popular in Finance
This 2 page Class Notes was uploaded by D S on Saturday October 17, 2015. The Class Notes belongs to FIN 501 at University of Illinois at Urbana-Champaign taught by Tatyana Deryugina in Summer 2015. Since its upload, it has received 18 views. For similar materials see Financial Economics in Finance at University of Illinois at Urbana-Champaign.
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Date Created: 10/17/15
Financial Economics Week 7 Professor Tatyana Derugvina University of Illinois Urbana Champaign Text 1 Game Theory What is the difference between the decision and strategy problem price taking there was no thought about the neighbors pricing their own nor of our own picking affecting others pick 23 of what other will choose is a strategy problem Basic games components players strategies game tree outcomes utility for each outcome Penalty Shot the shooter and goal keeper want opposite things in that the keeper wants to shoot in the same direction while the shooter wants it to be different directions Grid is presented as utilities and players are expected to maximize expected utility honestly optimal strategy would be randomize if you don t want your rival to guess your action Sequential Games Corporate TakeOver Build up the tree as each probability function is given It started with hostile takeover or pass and within hostile take tover resist or give up Learned that need to make things credible potentially dd possibility to cooperate repu tation linking or 3rd party reputation if you re tough then helps reputation or something like N Korea people think you re crazy linking trade agreement issue is because the world is econoimcally interconnected 3rd party incentivized to not default loan court system One failure was that the the US promised to protect Urkraine s borders in 1994 However that was a false promise because in 2014 Russia invaded crimea and the US did nothing for reputation need to be willing to absorb short term loss putting in extra time being strict in grading thus in the long terms students will be careful 2 Game Theory II Rules of Strategy Thinking thinking contingently try to know your rivals and how risk averse are they look ahead and reason backward Prisoner s Dilemma more general problem since in many other problems while society would want people to cooperate individuals dominant strategy is to defect note that the ma a can solve the prisoner dilemma by using force on prisoners in case they talk making defection unattractive government can also establish laws and penalties which eventually change the payoff public good provision problems Coase Theorem if there are clear property rights and enforcement of contracts then negotiation leads to efficient outcomes like CC VW Prisoner s Dilemma since consumers don t really care car companies incentivized to check Athlete s Doping D 139 D ND 139 D people aren t incentivized to do inspections Think Contingently Know your rival idea of Common Knowledge Tough Guy Tender OFfer 2 Tiered offer high big and then a lower bid price don t accept not go through 100 don t accept goes through 90 accept 105 People put stop gaps in place to prevent takeovers like poison pill Poison pill where if another company acquires X amount then shareholder can by stock at 50 of the price Game which side of the road to drive no dominant strategies honestly neither part gains by changing Nash Equilibrium pair of strategies where each person s best strategy is directly dependent on their partners Meet in ny too many equilibria face a coordination problem Game of Chicken issue with equilibrium choose to be a chicken since it maximizes the minimum payoff Max Min strategy when the games are complicated
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