Thinking Strategically: Psychology, Economics, and Experiments

Suppose you are playing tennis. Your rival is at the net and had just volleyed to you on the baseline. You are about to hit a passing shot. Should you play down-the-line or crosscourt? Conventional wisdom favours the down-the-line shot, because the ball has a shorter distance to travel to the net and so your rival has less time to react. However, if you would use this shot all the time, your rival would confidently come to expect it and prepare for it. So, the shot would not be so successful. To improve the success of the down-the-line passing shot, you must use the crosscourt shot often enough to keep your rival guessing on any single instance.

This course will teach you how to think strategically in situations in which you interact with others. Strategic thinking, however, is not only important in playing tennis; it is prevalent in daily life at work and at home. Managers and corporations must use competitive strategies to survive in the market. Parents and kids bargain for pocket money or the assignment of housework. In all these situations it is better to be a good strategist than a bad one. This course aims to help you to improve your skills at discovering and using effective strategies. Good strategic thinking is an art, and the science of strategic thinking is called Game Theory:

• On a theoretical level, the course provides an introduction into the basics of Game Theory. In particular, we focus on the basics principles of strategic thinking and apply these principles to different interdependent decision-making situations. We illustrate these theoretical insights with movies, case studies and applications from different areas.
• On a practical level, the course focuses on current research in experimental economics. Here, we use the experimental results from the literature in this field to illuminate the validity of our theoretical predictions. Furthermore, you will use classroom experiments to test and experience your interdependent behaviour in the interaction with your classmates. The topics of these experiments range from the sound of silence over tolerating laziness to why gambling the night away.

To classify the variety of games we consider the following two basic criteria:

• The degree of conflict: Whenever a group of individuals interacts in a particular situation, individual preferences of these group members may be in conflict. In the tennis game, for example, the players' interests are strictly opposite. When meeting a friend, on the other hand, there is no conflict of interest. In the first case, we speak of games of pure conflict, in the latter one about games of pure cooperation. Between them are games of mixed interests.
• The degree of behavioral uncertainty: According to this criterion, players can be either determined, unpredictable or ambiguous in their behaviour. An example for the first case arises in team games when team members have mutual interests. The tennis game is an example where players want to be unpredictable in their play. Players are ambiguous in their behaviour if there are several possible ways how they could optimally behave.

Given these two dimensions, we discuss the following classes of games in our course:

1. Prisoners' Dilemma Games, where interests are mixed, and players' behaviour is determined
2. Dis-coordination Games, where players don't want to coordinate their behaviour so that unpredictability is important
3. Zero-sum Games, where interests are strictly opposite so that players either win all or lose everything
4. Battle-of-Sexes Games, where players have mixed interests and behaviour is ambiguous
5. Coordination and Anti-coordination Games, where players have common interests for either getting together or stepping aside and their behaviour is ambiguous

Overall, this course has six sessions. The five classes of games are subjects of Session 2 to 6. In a first Session 1, I introduce into the basics of game theory and strategic behaviour. Each session - except the introductory Session 1 - is divided into two major parts:

1. First, in a two-hour block, I present the theoretical background and illustrates these insights with the help of numerous case studies, movies and applications.
2. Second, also in a two-hour block, we have two presentations about experiments, which complement and further develop important aspects of the theoretical part. Each experiment is based on an experimental research paper and prepared run by a group of two to three students.

At the beginning of the course, you can choose the topic that interests you most. You and your group members will then be handed out a research paper that covers this topic. Based on the experiment explained in the paper, your group needs to design a simplified and creative version of the experiment that you can play with your fellow students in the classroom. You need to set-up the procedure of the experiment, determine experimental treatments, specify the participants' payoffs, and design all materials you need to run the experiment. We will upload guidelines that will help you in this process. Please also contact us, so that we can clarify any problems and discuss your ideas. After you have run the experiment, you should discuss the underlying paper and practical implications with your fellow students in a short presentation.

After each of the sessions, you have to prepare problem sets at home dealing with the discussed problems. The answers should be submitted before the beginning of the next session.

Your grading depends on four criteria as follows:

1. Experiment: 35%
2. Presentation: 35%
3. Individual Assignments: 30%
4. Class participation: Tiebreaker

For more information on this course, please see the syllabus

Syllabus File

For more information how to run an experiment, please see the guideline

A Guideline on How to be Successful

The slides for this course are accessible here

Session 0 - Introduction

Session 1 - Theory

Session 2 - Prisoners' Dilemma Games

Session 3 - Discoordination Games

Session 4 - Zero-Sum Games

Session 5 - Battle of Sexes Games

Session 6 - Coordination Anti-Coordination Games