Introduction: Five First Lessons

Yale ECON 159 Game Theory, lecture 1, explained in plain English

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Part 1 · 0:00–10:00

The professor explains what game theory is, where it is used, and how the course will be run and graded.

Key ideas

Game theory is a way to study strategic situations. A situation is strategic when the outcome that affects you depends on the actions of other people, not only on your own actions. 1:35
Perfect competition and monopoly are not strategic, because firms in those settings do not have to worry about rivals. Everything in between, such as imperfect competition with a small number of firms, is strategic. 1:10
Game theory applies to many fields, including economics, politics, law, biology, and sport. It is not only for economists. 2:04
Your grade is 30% problem sets, 30% midterm, and 40% final. The professor will curve the grades, and the median grade is expected to be about B+. 6:18
The textbooks are back-up. The professor says he will not follow them closely, so you should read the assigned chapters only when you need to reinforce something from class. 8:30

Words to know

strategic situation: A situation where what happens to you depends on what other people choose to do, as well as on what you choose.
price taker: A seller who has to accept the market price and cannot set its own. Firms in perfect competition are price takers, so they do not have to worry about what rivals do.
monopolist: The only seller of a product, so it has no competitors to worry about.
median: The middle value in a list. Half of the values are above it and half are below it.

Example

Think of three car companies, Ford, GM, and Toyota. Ford cannot just decide its own prices and sales plans without thinking about what the other two will do, because their choices affect Ford's results. That is what makes the situation strategic.

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Part 2 · 10:00–20:00

Students play a simple grade-choice game in class, and the lecturer shows how to record the game in a table and asks why people chose what they did.

Key ideas

The class plays games, and this first game is a grade game. Each student secretly picks Alpha or Beta, and the pairing decides the grades. 10:21
The lecturer puts all the grades into one table called an outcome matrix. It shows every choice and every result in one place. 14:13
In the matrix, the first grade in each box goes to the row player and the second grade goes to the column player. Each player's grade is easy to find once you know this. 15:04
Students who chose Alpha gave reasons such as responding to their partner's likely choice, or thinking Alpha gives better grades no matter what the other person does. 16:58
Students who chose Beta gave reasons such as wanting to work together, and the lecturer points out that caring about others' grades, or ethics, can be good reasons for choosing Beta. 19:58

Words to know

outcome matrix: A table that lists every choice each player can make and the result for each player, all in one grid.
row player: The player whose choices are listed down the side of the table. In this game, the lecturer is the row player.
column player: The player whose choices are listed across the top of the table. In this game, the lecturer's pair is the column player.
Game Theory: The study of games, where what you should do depends on what other people choose. The lecturer says the class will play many games.

Example

Imagine two friends each secretly pick a restaurant, and each one's happiness depends on what the other picks. Writing every pair of choices and the happiness each person gets in one grid shows the whole situation at a glance, just like the outcome matrix in class.

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Part 3 · 20:00–30:00

This part explains what a game needs (payoffs that show what people care about) and introduces the idea of a strategy that is always better than another, which the lecture calls strictly dominant.

Key ideas

A set of actions alone is not yet a game. We also need payoffs, which show what each person cares about and wants to get. 20:23
Game theory cannot tell you what your payoffs or life goals should be. Once you know your payoffs, though, game theory can help you reach them. 20:45
Numbers called utils or utilities stand for how much a person values each outcome. A higher number means a better outcome for that person. 22:11
A strategy strictly dominates another when it pays more no matter what the other people do. Alpha was better for the student in every case, so she should choose it. 25:04
The first lesson of the course is to never play a strictly dominated strategy, because the strategy that beats it does better in every case. 29:01

Words to know

payoff: The reward or result a person gets from an outcome, such as the grade they receive or how much they value it.
utility (utiles): A number that stands for how happy or satisfied a person is with an outcome. People try to make it as high as they can.
strictly dominates: One choice always gives a better result than another choice, no matter what the other people do.
normative: About what people should do, rather than what they actually did.

Example

Imagine two shops where one always sells the same item for less, whatever the other shop does with its prices. A shopper who wants to pay the least should always pick the cheaper shop, because it is better in every case. That is the idea behind a strictly dominant choice.

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Part 4 · 30:00–40:00

This part explains why people who each make the sensible choice for themselves can still end up with a bad result for everyone, using a game called the Prisoner's Dilemma.

Key ideas

The argument that 'if we both reason the same way, we both do better' is wrong. My reasoning does not control what you choose. 30:23
Even if I could somehow control everyone's choices, I would still do better by choosing Alpha. So the argument fails twice. 32:01
There is a true part to the argument: when both pick Alpha, both get 0, which is worse than the 1 each they could have had. Choices that are rational for each person can still lead to bad outcomes. 32:23
In a Prisoner's Dilemma, each person is better off doing the selfish thing no matter what the other person does. Yet both doing it leaves both worse off. 33:28
Writing a contract or agreeing to talk is not enough by itself. A contract works because it changes the payoffs, meaning it adds a penalty for breaking the deal. 39:48

Words to know

Prisoner's Dilemma: A game where each player does better by acting selfishly, no matter what the other player does, yet both end up worse off when both act that way.
Dominated strategy: A choice that is always worse for you than another choice, no matter what the other person does. A dominant strategy is the opposite: always the best choice for you.
Pareto inefficient: An outcome where you could make someone better off without making anyone worse off. The lesson says 'suck' is a simpler word for this.
Collusion: When rivals secretly agree to work together instead of competing, for example by agreeing not to lower prices.

Example

Two roommates share a dorm room. Each would like the other to clean up, but if the other person does not clean, cleaning yourself is the worst deal. So neither cleans, and the room ends up messy for both.

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Part 5 · 40:00–50:00

This part shows that changing what players care about (their payoffs) can change the whole game and the choice they make, and it introduces the idea of a coordination problem.

Key ideas

Colluding firms and crooks in jail need a way to keep their deals. The lesson says the mafia does this job where legal contracts are hard to write, by punishing anyone who breaks a deal. 41:03
The same game can have different payoffs. Here, guilt lowers your score when you get an A and your partner gets a C, and indignation lowers it when you get a C because your partner made you get one. 43:23
With these new payoffs, students split their choices. Some pick Alpha to avoid the worst case, and others pick Beta to chase the best case. 45:53
Neither choice is dominated, so there is no clear best move. This kind of game is called a coordination problem, and it is a different kind of game from the first one. 47:22
The main lesson is that payoffs matter. Figure out what you want before you analyze the game, as the Joe Jackson line says. 48:28

Words to know

collude: To secretly agree with others to work together for a shared gain, usually against the rules or against other people.
payoffs: The score or reward each player gets from each possible outcome of the game. It can include feelings like guilt or pride, not just money or grades.
dominant strategy: A choice that is always better than the other choices, no matter what the other player does.
coordination problem: A game where players do best by matching their choices, but there is no obvious choice to pick, so they have to work out what the other player will do.

Example

Imagine two friends deciding where to meet for dinner. One loves pizza and the other hates it. Their choices and results depend on what each person cares about, so the same choice can feel good or bad depending on their goals, just like the payoffs in the game.

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Part 6 · 50:00–1:00:00

This part shows how to pick a move in a two-player game by working out what the other player will do, and it ends with a real-world finding that many people do not pick the 'safe' choice.

Key ideas

When one choice always pays more than the other, no matter what the other player does, that choice is called dominant. For the evil git, Alpha pays more than Beta in every case, so Alpha is the right choice. 52:13
The indignant angel has no dominant choice of her own, but she can still work out the answer. Her opponent's Alpha is dominant, so the opponent will pick Alpha, and the best reply to Alpha is Alpha. 55:11
The main lesson is to put yourself in other people's shoes. Work out what they care about and what they will likely do, then respond to that. 57:33
It is harder to do this when you do not know the other player's payoffs. You may have to estimate the odds of what kind of player they are. 58:22
In real experiments on this kind of game, about 70% of people choose Alpha and about 30% choose Beta. The lecturer suggests some of the Beta choosers may simply be nice people. 59:12

Words to know

dominant strategy: A choice that gives you a better result than your other choice, no matter what the other player does.
payoff: The reward or score a player gets from a particular outcome of the game.
payoff matrix: A grid or table that shows every pair of choices each player can make, along with the payoff each player gets from that pair.
best response: The choice that gives you the best result, given what you think the other player will do.

Example

Imagine you and a friend are both deciding whether to split a bill evenly or pay only for what you ordered. If your friend always pays less by choosing the same thing you do, you can predict their move by thinking about their situation, not just yours. This is the same skill of putting yourself in someone else's shoes.

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Part 7 · 1:00:00–1:08:56

The professor asks why some students choose the risky Beta option, runs a 'pick a number' game in class, and ends with five lessons from the course.

Key ideas

Some people in the experiment chose Beta, which the professor suspects may be because they thought they would play the same partner again. Or they might not have understood that it was a one-time game. 1:00:00
Most economics experiments are run on university undergraduates, so their results may not describe everyone. At Yale, about 15% of the class chose Beta, which is less than the 30% from the earlier example. 1:00:42
In the 'pick a number' game, each player picks a whole number from 1 to 100. The winner is the player whose number is closest to two-thirds of the class average. 1:03:09
The professor works through an example with three numbers: 25, 5, and 60. Their average is 30, so two-thirds of the average is 20, and 25 is the closest pick and wins. 1:04:50
In the final recap, the class names lessons from the course. One is that rational choices, meaning choices that make sense for each person, can still lead to bad outcomes for everyone. 1:08:13

Words to know

one-shot game: A game played only once, so there is no chance to play again with the same person and no need to build a reputation.
multi-shot game: A game played more than once with the same people, so choices now can affect what happens later.
payoff: The reward or result a player gets from a choice in a game, such as money or points.
strictly dominated strategy: A choice that is always worse than another choice, no matter what the other players do. The lesson says not to play one.

Example

Think of a tug-of-war between friends who each want to be the strongest. If you guess what the others will do and pull in the wrong direction, you can lose even if you are smart. Game theory asks you to think about what others will do before you choose.

3 checked practice questions for this part are in the app.

Notes written by AI (Claude) from the lecture's official transcript, so check anything important against the lecture. Open Yale Courses · CC BY-NC-SA 3.0 · not affiliated with or endorsed by Yale. These notes are shared under the same license.

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