 Hi, my name is Sasha and my topic is game theory. I started economics many years ago and this is the only thing I can remember from that time and So we start with a strange question. Is Indiana Jones stupid you have chosen Okay, you may know this scene for those who don't know it's about Indiana Jones father is dying on the ground and Indie has to choose the right cup Which gives you eternal life if you drink it if you choose the wrong cup and drink it you will die immediately And so in the movie he chooses the cup and he says there's only one way to find out He tries it first then of course It's the right cup because it's Hollywood and then he gives it to his father who is alive. Well in this case It works, but what if the cup was false So he has two choices actually to give the cup first to his father or to drink it first himself So what happens if the father drinks the poisoned cup first? He will die unfortunately but Indie will stay alive in this case, right and What if it's Indie who drinks first the poison cup like in the movie? He will die and his father will die because he is starving. So actually Mr. Jones junior has chosen the wrong strategy. The only way to find out is to give the cup to his father because because Indie would stay alive in this case and This is the so-called dominant strategy. I will return later to it so you see Hollywood doesn't care much about logic and This example was actually from decision theory, which is related to game theory and what is game theory? Well, as you can imagine game theory is not how to in car races on PlayStation or something It's about another game. We play every day. It's about the most realistic game ever and it's called life You can play this game using Windows like this guy Okay jokes aside. So game theory is a mathematical approach for predicting people's behavior Depending on decisions of other people So a game is being played whenever people have anything to do with each other And there's always some kind of conflict and cooperation in these situations. For example Romeo and Juliet have played a teenage mating game, which didn't work out too well USA and USSR have played a dangerous game during the Cold War with nuclear weapons a Supermarket manager deciding the price for his pizza is playing a game with all the other storekeepers around him So all these are games Unfortunately game theory can't solve all of the world's problems because it's only about what happens when people interact in a Rational manner. That's why we can't predict the behavior of love-seek teenagers like Romeo and Juliet And now I would say let the games begin and who wants to play a game with me Okay, I have seen this guy and the guy with the white shirt. Can you please come to the stage? And I have some good news for you guys. We will play for money And you can win this me please go here What's your name? Please write your name on the paper and what's your name? please write it on your paper and I want everybody to be silent during the game keep the pen Place yourself back-to-back Here right very good. All right, and now the rules Imagine you are directors of two scientific institutes And you are in great financial troubles. You need financial support Otherwise you have to you have to close your institutes fire all your employees to stop your research And you won't win the Nobel Prize And in this difficult time there comes the messiah and that's me I am a very rich investor who has a lot of money and I want to invest in science And doesn't matter in which in your institute or in yours or in both and now I come to you first and I have a Following suggestion. I can give you one euro now or I can give two euros to the other institute down the street Now come to you and have the same suggestion I can give you one euro or I can give two euros to the other institute over there So the rules are common knowledge. You both know the rules and you both know that the other knows the rules and Please write now on your paper one euro if you want to keep the money or two euros You if you want me to give the money to the other Okay, can I get thanks? You get it. Thanks a lot I will first do the analysis and then reveal your answers. Please take your seat and a big applause for you guys You will get your money so for you guys I will show something on here on the flip chart if you don't see it you need to Stand up, please So one thing I forgot here. I Have my prediction for this game. I have my own prediction. I know in advance what the outcome will be we will Do the analysis and then look if I am right put it here All right, so we can express this game in a matrix like this right, so We have two players player number one and player number two and They have different choices. We call them strategies. So the first strategy is to keep the money Let's call this an egoistic strategy And the second strategy is to give the money to the other So this is the cooperative strategy like they want to cooperate cooperative So now we need the outputs what will Happen so if both play egoistically if both decide to keep the money They will get one euro each right if both decide to give the money to the other Institute They will get two euros each and if player number one for example decides to keep the money So he will play egoistical strategy and the other guy decides to give his money So player number one will get three and the other Nothing and the same here the other way around Right, so now we have expressed our game in a matrix form and now we need to make a Prediction how will they behave and the most common way to do so is to Find an equilibrium because an equilibrium is a stable situation where nobody wants to change his position in game theory We call this a Nash equilibrium because of this guy on the left Who was a mathematician and contributed a lot to game theory you may know him by the movie? Beautiful mind actually so and where is our Nash equilibrium here? Well, let's see from the perspective of player one from the reds perspective. He is thinking Okay, what if player number two wants to keep his money? What should I do? What is better for me? Well, it's obvious. I should also keep my money I should play egoistical because he I will get nothing and what if player number two is Giving his money to me. Well in this case, it's again better for me to keep my money because threes bigger than two so and we see that the egoistical strategy is the dominant strategy remember Indiana Jones and Player number two is the same situation His egoistical strategy is also the dominant one and at the end they meet here both get one euro and this is our Nash equilibrium great But something's bad here. Isn't it look at this field They both could have earned more if they cooperated together instead they instead of they end up here with one euro each Why does it happen? Because from a rational point of view the egoistical strategy gives you always a bigger output doesn't matter what the other player does This field here is not an equilibrium Imagine for a moment. They both will cooperate. They are here. So what will player the red player think? He was thinking what if I change my mind? What will happen if I change from here to egoistic one? Well, then I will get three euro of course I should do so Please notice. We are talking here right now. This is a model. We're talking about Rational agents rational robots who just thinking three is bigger than two then I will choose this So we're not talking about friendships or relationships or ethics So and player number two will think the same. He also wants to change here and In the end they end up here with one euro each and this is a tragedy. This is a dilemma The face of the evil on earth if you want Because if they cooperate it they could have The whole society the whole group would get two plus two is four and instead they get only two one plus one is two and This is the most famous game in game theory It's called the prisoners dilemma. So we have seen the dilemma why it's called prisoners dilemma Well because in its classical form There's a story about two criminals committed a bank robbery and being caught by the police and put in separate rooms so when they have Two strategies to keep silent don't speak or to confess So to betray the other if they both keep silent They will get one year in prison just because they are criminals if they both confess They will get five years in prison each and if the red guy confesses So if he betrays and the brown guy still keeps silent the red player will come free and Brown guy will spend 10 years in prison as a penalty for holding out So and the same the other way around and again they both both should cooperate Spending only one year in prison, but it doesn't work because the red players Kerminal is thinking what what if the brown guy confesses what should I do? well, I should also confess five years is better than ten years in prison and if The other guy keeps silent. Well in that case I definitely should confess because I will go free and the brown guy has the same argumentation at the end again Confessing is the dominant strategy and they will both spend five years in prison instead of one Year and this prisoners dilemma shows in an elegant way That if each individual pursues his own self-interest the outcome for each and for the group is worse Then if they had cooperated That was the theory and now let's look on a real-life example. I prepared one. It's about Steroid use in sports. So there are two choices to strategies to take doping or don't take doping so in the best option for everybody is not take doping because it's Fair play and good for your health good for a buddy if anyone Does take doping he will have an advantage Compared to the others, but if everybody takes stopping this advantage disappears But the disadvantage is stay like your ruined body and your ruined health You can observe actually this example very good in cycling sport, which is Unfortunately very very spoiled Yes, I Okay And now you now you ask the question do people always behave like the theory predicts to people always cheat and Here I can give you a clear-cut answer It depends This is the favorite answer of economists to all questions Well, we are social human beings and we often think how the group might decide We're looking from the perspective of the group and try to find an optimistic decision if you play this game several times if you repeat it we can build relationships and cooperation gives both a bigger output imagine an eBay trader who Receives the payment, but doesn't deliver the goods He will not survive in the market. So in the long-run perspective, it is wise to cooperate Well, and now the showdown how did our Audience behave who will get the money who will be in the chips and I'm very happy that this About this result they behaved like real game theorists. Everybody wants to keep the money. So guys, thanks a lot. I Thank you very much because during the rehearsals. I lost a lot of money already And this is for the first time. Well, and now let's look if On my prediction so we know The model predicts this Outcome and this is what happened, but also in reality people don't behave always like this But of course since I'm a good game theorist. I predicted the right result So Thank you very much for listening if you recognize in your life Situation like prisoners dilemma try to avoid this trap and try to find a cooperation to increase the wealth a welfare of the group Thanks a lot