Study Notes for People in Business and Society (E_IBA1_PBS)
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Vrije Universiteit Amsterdam (VU)
International Business Administration
People in Business and Society (E_IBA1_PBS)
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CHAPTER 1
TALES OF STRATEGY
1- When playing a game, you must consider how the other player will act and how
those decisions will influence your strategy
2- You need to be able to anticipate all the different moves before they happen
3- A person who experiences a successful outcome has a greater chance to have
continued success
4- Imitate when knowing others’ strategies or wait until you know whether the
approach is a success or failure, depending on the situation
5- Having more options isn’t always a good thing, it is better to cut off options instead if
you want to reach a goal
6- When thinking strategically, you must work extra hard to understand the perspective
and interactions of all the other players in the game, including ones who may be
silent. You must consider what they know, what motivates them and how they think
about you.
Zero-sum game: when two companies agree to a trade, each company thinks it will make
money. One of them must be wrong. Both sides cannot win
Winner’s curse: the result of winning an auction and discovering you’ve overpaid
Bid-ask curse: the difference between the buy and the sell prices
CHAPTER 2
Interactions in game theory arise in two ways:
Sequential (players make moves after each other)
Simultaneous (players play at the same time)
In sequential move games, it is important that a player can anticipate the moves of the
other player and use that in calculating his own best current move. You do this by looking
forward and reasoning backwards. By looking forward and reasoning backwards, a player
looks ahead, not just to his future decisions, but also those of the other player. A game tree
can be used as a visual aid for correct reasoning in such games.
- In many games, backwards reasoning is largely influenced by probability.
- In games where there are people involved, knowing the other person’s objective
isn’t enough to play the game, because you’re not certain about their objectives. For
example in business or politics, people’s motives can be influences by selfishness,
concern for fairness etc.
, - When making simultaneous moves, players must face uncertainty about other
players’ choices.
ALTRUISM AND FAIRNESS
In game theory, players don’t always care about their rewards, but act out of fairness or
altruism. Groups that insist on norms of fairness/altruism for their group members will have
less internal conflict than groups consisting of pure selfish individuals. Therefore, they will
be more successful in taking collective action.
CHAPTER 3
PRISONER’S DILEMMA
In a prisoner’s dilemma, everyone has a personal incentive to do something that ultimately
leads to a result that is bad for everyone when everyone similarly does what his or her
personal interest dictates.
A player is said to have a dominant strategy if that same strategy is better for him than all of
his other available strategies no matter what strategy or strategy combination the other
player/players choose. In a prisoner’s dilemma, all players have dominant strategies. When
all players use their dominant strategy, all do worse than they would have if somehow they
could have jointly and credibly agreed that each would choose the other dominated
strategy.
HOW TO ACHIEVE COOPERATION
- Detection of cheating (before cheating can be punished, it must be detected. If
detection is fast and accurate, the punishment can be immediate and accurate. That
reduces the gain from cheating while increasing its cost, and thus increases the
prospects for successful cooperation)
- Nature of punishment (Sometimes the players have available to them actions that
hurt others, and these can be invoked after an instance of cheating even in a one-
time interaction)
- Clarity (The boundaries of acceptable behaviour, and the consequences of cheating,
should be clear to a prospective cheater. If the things are complex/confusing, the
player may cheat by mistake or fail to make a rational calculation and play by some
hunch)
- Certainty (players should have confidence that defection will be punished and
cooperation rewarded)
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