Lecture 16 - Backward Induction: Reputation and Duels

In the first half of the lecture, we consider the chain-store
paradox. We discuss how to build the idea of reputation into game
theory; in particular, in setting like this where a threat or
promise would otherwise not be credible. The key idea is that
players may not be completely certain about other players’ payoffs
or even their rationality. In the second half of the lecture, we
stage a duel, a game of pre-emption. The key strategic question in
such games is when; in this case, when to fire. We use two ideas
from earlier lectures, dominance and backward induction, to analyze
the game. Finally we discuss two biases found in Americans:
overconfidence and over-valuing being pro-active.