Imagine being questioned by the police. Your partner is being questioned separately in the next room. If you stay silent and your confederate admits to implicating you and gets a lighter sentence as a reward, that would mean a better outcome for you. You. Tell the truth and confess. They are. Stay quiet. If game theory is correct, both of you will confess, earning an intermediate level of punishment, but forgoing the lesser penalty you both could have had.

Competition, price, profit, the quest for market power, and other factors make the marketplace an interesting arena for game theory.

Understanding economics is related to game theory. You will be introduced to the basics of this fascinating subject through the lens of economics in 12 entertaining half-hour lessons. One of America’s best college professors, Dr. Corrigan uses minimal math and maximal ingenuity, combined with insightful graphics, to illuminate scenarios.

• Swine Strategy : The fight for food between a big pig and a little pig reveals a Nobel Prize-winning concept in game theory. Devised by John F. Nash, the Nash equilibrium explains why the little pig should wait by the food trough while the big pig pushes the food-dispensing lever, which is located across the pen. The big pig then has to trot to the trough and nudge the little pig out of the way, but it is both animals’ best strategy.
• Ultimatum Game : Human psychology complicates game theory in the ultimatum game, in which two players interact anonymously. One proposes to divide a sum of money. The other either accepts the split or declines, in which case no one gets anything. In theory, the second player should accept any division, since something is better than nothing. But people often ignore this reasoning over fairness issues.
• Going, Going, Gone! : Auctions offer efficiency to both buyers and sellers. Professor Corrigan examines four basic types of auctions and the most effective strategies for each. One notorious pitfall is the “winner’s curse,” common in auctions where the value of the asset being sold is the same for everyone, but is unknown—for example, the acquisition of mineral rights. The winner typically overpays and risks financial ruin.

Professor Corrigan makes the winner’s curse clear in his economics classes by having his students bid on a jar filled with coins. As in real-world auctions for common-value goods, the winner is a student who overestimates the value of the contents. Learning that you are the winner can be bad news.

The principles of game theory can be learned.

The dominant strategy and the Nash equilibrium are two key ideas of game theory. No matter what the other player does, you have a dominant strategy if one course of action is best for you. The prisoner has a dilemma. When both sides confess, the prisoner’s dilemma is the same as the Nash equilibrium is if no player has an incentive to change his or her strategy. In. Understanding economics is related to game theory. You learn how to spot the key ideas in games.

A payoff matrix is a table that shows every player’s payoff based on the strategies they pick. You start the game at the last round and work your way back to the beginning to determine your best opening move. These are powerful tools that can help you see the game from different points of view.

Professor Corrigan analyzes real-life examples of game theory in practice so you can understand how these principles work and how they would be applied in the world.

• College Collusion : Over the course of three decades, 57 elite US colleges conspired to fix tuition and financial aid awards, preserving their budgets while shortchanging students and parents. The cartel lasted so long because the schools were effectively playing an infinitely repeated prisoner’s dilemma game, in which it was in their interests to cooperate—until the Justice Department intervened.
• Choose Your Weapon : In an era before credit scores, dueling may have served the function of establishing creditworthiness. This was a high-stakes solution to the problem of asymmetric information in lending. If you valued your reputation for honesty enough to issue or accept a challenge to duel, then you were considered a good credit risk—although perhaps not a good risk for life insurance.
• Mixing It Up : It pays to be unpredictable in games where you don’t want your opponent to guess your strategy. This is called a mixed strategy, as opposed to a pure strategy where you always choose the same game plan. An example is a store’s deep-discount sales, which should be unpredictable so customers don’t put off their purchases. Exceptions like seasonal Black Friday sales generally don’t give the best bargains.

There are games everywhere.

While economics is the focus of this course, Professor Corrigan’s examples come from a wide range of activities, since game-like behavior is a universal element found in society. Evolution has played the world’s longest game in achieving equilibria among different species because animals follow the principles of game theory. In the game of chicken, two teenagers drive straight at one another until one of them gets away. Animals participate in this contest.

Understanding economics is related to game theory. It will make you want to see games everywhere, even at home. Professor Corrigan will make you think about who are the players. What are their strategies? What are the payoffs? What is the equilibrium? You will notice how many games you play without realizing it, from negotiating the purchase of a car to deciding whether to accept an airline’s offer of a voucher to give up your seat on an oversold flight. It will give you the confidence to weigh your options, size up the competition, and choose a plan of action.