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Game theory is a topic that isn’t covered much in the A-Level Syllabus but it does come up often at interview so it is useful to read up on it. Game Theory is a great way for the panel to see how your brain works and if you can cope with new material as it is easy to tweak the scenario slightly so that you cannot rely on memory alone to answer the question. The Prisoner’s Dilemma is a favourite but is relatively easy to understand so I will use a different question to show you how to answer a game theory question.

In Economics, we presume that all people act rationally – it is important to remember this when attempting to answer a question. You must also be sure to clarify all the details for a question and the circumstances, especially regarding what information the Economics Actors have before making their decisions as this can affect their actions.

 

The mistake a lot of students make is to rush into the answer. What you should be asking first is all the questions that you can think of in order to be sure you have the necessary information to come to the right answer. Here are some of the questions you should be asking, along with the answers you could be given:

  • Does Person B know about the offer or are they just being offered money without knowing their acceptance is necessary for you to get the rest? (If they know, it is likely you will have to offer a higher amount to guarantee they will accept it.)
  • Is person B a friend or a stranger? (If they are a friend, you may feel you should offer more but rationally, you would not.)
  • If they reject your offer, do you get to make a different offer? (If this is a game you can repeat, it is likely you would start with the lowest offer possible.)

The interviewer tells you that Person B does know about the choice, that they are a stranger and that this is a one time offer and will be accepted or rejected with no further discussion.

At this point, you need to consider the information and remember that you are both rational agents.

If person B acts rationally according they should accept any offer you make since doing so leaves them with more money than they would have had otherwise. A division which gives you £99 costs Person B nothing, so they have no purely rational reason to reject it. If you know that Person B will act rationally, and you yourself act rationally (which you may not do if Person B was a friend), then you should offer Person B £1 and keep £99 for yourself. However, it is always important in Game Theory questions to demonstrate that you understand that in reality, economic agents are not rational and that in practice, Person B is likely to reject any offer that they regard as unfair.

Now try and work through what your answer would be if the interviewer had told you that Person B did not know about the choice and/or that they were a friend and/or this was not a one time game.

Good luck!

All views and ideas represented in this blog post are exclusive to Resham, and do not represent those of any other third party.

 

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