3-9 Lecture 1

Game theory:
 Identifying determinants of human decisions in strategic situations
 Mathematical models that describe strategic situations

4-9 Lecture 2

National culture ( NL, Eng etc.)

Organizational culture (corporate) HEMA, bijenkorf etc.
Occupational culture, managers workers etc.

Six dimensions of national culture:

1. Power Distance Index (PDI)
The extent of which less powerful people accept and expect the power is distributed
unequally. (small or large power distance)
2. Uncertainty Avoidance Index (UAI)
Ut deals with a society’s tolerance for ambiguity, to what extent a culture programs it
members to feel un/comfortable in unstructured situations.
3. Individualism vs. Collectivism (IDV)
Is the degree to which people in a society are integrated into groups, Individualist is
expected to look after them self’s and family, collectivist side cultures in which people
are integrated into strong cohesive groups.
4. Masculinity vs. Femininity (MAS)
As a societal not individual characteristic, refers to the distribution of values between
the genders.
 [dimensions added later:
5. Long-Term Orientation vs. Short-Term Orientation (LTO)
Long term orientated societies values found were perseverance, thrift, ordering
relationships by status, and sense of shame. Short term were reciprocating social
obligations, respect for tradition, protecting one’s ‘face’ and personal stability.
6. Indulgence vs. Restraint (IND)
Indulgence, society which allows relatively free gratification of basic and natural
human desires related to enjoying life and fun. Restraint, society which controls
gratification of needs and regulates it by strict social norms.

10-9 Lecture 3

Simultaneous move games, (same deadline of decision)

Sequential, (moving in turns)

Game trees sequential moves:

 Players are rational
 Common knowledge of the game
 Everyone knows that everyone is rational etc. etc.

Nash equilibrium = no player wants to deviate to another strategy given the rest of the
players are playing the equilibrium strategy

11-9 Lecture 4

Look forward and reason back

Effective presentation (pyramid)

 Storytelling the journey as its own reward
 Flip your way of thinking
 Lay a foundation for the arguments
 Develop a logical structure (the pyramid)
17-9 Lecture 5 (1.2)

Credible and non-credible promises and threats:

 Promises during electoral campaigns, meetings, etc.
 Non-binding communication = cheap talk, is it a credible promise/threat?
 Backward induction and sequential move games help analyze these.
In the book:
Credible promise/threat = assurance/warning
Incredible promise/threat = promise/threat

Making incredible promises and threats credible:

1. Contracts (business deals, establish a penalty)
2. Reputation (public declaration of resolve)
3. Cutting of communication (prevent renegotiation)
4. Burning bridges (denying oneself an opportunity to retreat
5. Leaving the outcome beyond your control (automatic response)
6. Moving in steps (splitting deals in parts, no clear final step)
7. Teamwork (joint achievement of goal)
8. Mandated negotiating agents (Impersonal, promise/reputation in front of electorate)

Rosenberg’s model of non-violent communication:

1. Expressing own needs
2. Sensing others needs
3. Checking if needs are received
4. Providing empathy to hear needs of others
5. Translating strategies into positive actions and language.

Lecture 2.1
Simultaneous move game
Prisoner’s dilemma; price wars

18-9 Lecture 6 (2.1)

Rule of strategy 4: having exhausted the simple avenues of looking for dominant strategies,
next search all the cells of the game table for a pair of mutual best responses in the same
cell, Nash equilibrium. Outcome that is best response for all players.

Mixed strategy = player mixes the available pure strategies

Zero-sum games (you lose payoff if other player knows what you are planning to do like rock
paper scissors)

Lecture (2.2)
Prisoner’s dilemma can be for multiple people:
Public goods game = contribution
Common resource pool game = extraction

Social dilemma:
Social optimum = full contribution, no extraction
Individual optimum = no contribution, full extraction
Important in reality = often repeated interactions

Cooperation starts high, but declines over time in finitely repeated games, backward
induction: no cooperation from start
50% conditional cooperators, 15% hump shaped cooperators, 30% free riders.
Individuals punish, even when costly and sub-optimal.
Successful punishment regimes:
 Detection of cheating: faster/more accurate, the better observable
 Nature of cheating: social sanctions, monetary, interruption of future relationship
 Clarity: boundaries and consequences of cheating
 Certainty: confidence defection will be punished, and cooperation rewarded

Big tutorial 18-9

Equilibrium path = the final solution, how the game actually plays out
Perfect Nash equilibrium = all best choices in the game
Coordination game: describes a lot of strategic situations, can have multiple equilibria,
cooperation game has only one Nash equilibrium

24-9 Lecture 3.1 Games with incomplete information (adverse selection, moral hazard)
Asymmetric information; might not know something about others or vice versa.
Hidden action = behavior, decisions. Often post-contractual, i.e. effort at work, honesty. Can
lead to moral hazard.
Hidden characteristic = types, like tough or accommodating, often pre-contractual, i.e.
health insurance, product quality.
Can lead to adverse selection when combined with opportunism leading to sub-optimal
outcome in the market.

Principal-Agent problem; principal has information disadvantage, decides on incentive

scheme for agent but agent chooses level of effort, unobservable by principal.

Agent will choose low effort bcs s > s – 10

Equilibrium path = P chooses s = 0 and A chooses low effort

Bayesian Nash equilibrium is the choice of action of each type of each player such that given
beliefs and all choices, each type of all players maximizes expected payoff according to that
type’s beliefs

25-9 Lecture 3.2

How to prevent moral hazard:
Ownership as incentive, threat of relationship rupture, competition, variable reward.

Agent high vs low effort

0.4 x 200s + 0.6 x 0s = 80S
0.6 x 200s – 20 + 0 = 120s –
20
120s – 20 >= 80s
40s >= 20
S >= 0.5

Principals payoff: minimal share s = ¼ for high effort and s = 0 for low effort
EQ path: principal chooses s = 1/4 and Agent chooses high effort

Reciprocity: I feel like doing good to you if you did food to me (or bad for both)
Fixed wage contract implies trust in employee, employee feel like they should work hard in
return. Incentive contracts create feeling of distrust and expectation of shrinking on the
employee’s part; so employees do not work as hard.

Adverse selection : Price of goods depends on its quality, buyers willing to pay price
depending on expected quality, sellers of good quality want more and stop selling. Only bad
quality remains in the market.
How can adverse selection be stopped:
 Signaling: players possess favorable information and want to conceal it, take action
 Signal jamming: Players who possess unfavorable information want to reduce its
leakage, take action
 Screening: People who do. Not possess information set up situation which players
with favorable info take one action and players with unfavorable take another action.
Taking actions has to be costly, more so for players who possess unfavorable information,
it must be unprofitable for players with unfavorable information to pretend having
favorable.

How to prevent AS:

Credibility of information:
Market Solutions:
 Signaling: costly advertising, guarantee/ warranty (credible/non-credible)
 Screening:
health insurance deductible: (must be ‘incentive compatible’ insurance for low-risk
customer must contain an own risk)
Price discrimination: different willingness to pay for individuals based on private
information. (economy vs business vs first class)
How can a firm distinguish productive applicants form less productive?
Signaling: Credentials/ degrees (costly study program, why spend years studying?)
Screening: job assessments, probation, incentive contracts.
Some circumstance, most powerful signal is not needing a signal.