Final exam review: Module 12

Best response

the choice that yield the highest payoff given the other player choice

Second mover advantage

the strategic advantage that can follow rom taking an action that adapts to you roval choice flexibility to adapt your strategy in light of the choices made by the first mover EX: Walmart prints christmas specials, target sees it and makes its specials slightly lower EX: Walmart does price match guarantee *** all about flexibility ***

First mover advantage

the strategic gain from an anticipatory action that can force a rival to respond less aggressively Requires credibly committing - take concrete actions that'll make any other choice costly EX: invest in new jets, rent extra gates, and pre sell tickets with hefty penalties if it cancels ***all about commitment***

Representative bias

the tendency to assess the likelihood that something belongs in a category bu judging how similar they are to the category - make judgements based on you perception of a category of people Might lead you to consciously discriminate when hiring Think slow to avoid this

Anchoring bias

the tendency to begin with an anchor, or starting point, and insufficiently adjust form there Anchoring bias will lead you to systematically overestimate some probabilities - why projects always get delayed Leads to an overestimation of on the project successes Anchoring bias will lead you to systematically lead you to serve systematically underestimate some probabilities - underestimate the likelihood of failure

Focusing illusion

the tendency to mis-predict your utility by focusing on a few factors at the expense of others Solution to this: thinking slow and gaining insight from those who have experienced it

Availability bias

the tendency to overestimate the frequency of events that are recalled, and to underestimate the frequency of less memorable events You will remember vivid stories in the media then what real life actually reveals dramatically overestimate your chances of success. lead you to spend far too much time worrying about risks that are often in the news, but are actually very rare EX: Dramatic plane crashes lead some folks to be scared of flying, even though you're much more likely to die if you drive to a faraway city rather than fly

Overconfidence

the tendency to overrate the accuracy of your forecasts overconfidence can lead you to underestimate risks and make bad decisions - This is why entrepreneurs lose savings to businesses that fail - Being too confident is a recipe for failure

Strategic interaction

when you best choice may depend on what other choose, and the best choice may depend on what you choose Focuses on how your decision intertwined with those of others

Prune tree method

A method for solving game trees: Start by looking forward to the final period and highlighting out you rivals besp responses, then prune the options the rival would never choose - the "dead leaves" - off your game tree

Payoff table:

A table that lists your choices in each row, the other players choices in a column, and also shows all possible outcomes, listing the payoffs in each cell

Think about the "what ifs" separately

Break the problem into its simpler components, which are the various choices that the other person could make

Game tree

shows how a game plays out over time, with the first move formine the trunk, and each subsequent choice branching out, so the final leaves show all possible outcomes

System 2 of thinking

slower, deliberative, logical self, and it uses a methodical style of thinking that requires cognitive effort - "thinking slow"

Reason backward

start by analyzing the last period of the game. Use this to figure out what will happen in the second-to-last period, and keep reasoning backward until you can see all the consequences that follow from today's decision

Loss aversion

being more sensitive to losses than to gains Taking loses hurts more than making gains Sometimes loss is a bigger motivator than a gain

behavioral economics

economic analysis that includes psucholoi=gical factors in assessing how people make economic decisions

System 1 of thinking

intuitive thoughts - fast, effortless, and almost automatic

Look forward:

n games that play out over time, you should look forward to anticipate the likely consequences of you choice

Put yourself in someone else's shoes

put yourself in someone else's shoes in order to figure out what decision you would make if you faced their incentives

The four steps for making good strategic decision

Consider all the possible outcomes that could occur Think about the "what ifs" separately Play your best response Put yourself in someone else's shoes

Consider all the possible outcomes that could occur

Construct a table that lists each of your possible actions as a separate row, and each of the other player's possible actions as a separate column

Play your best response

For each "what if" play your best response Put a checkmark next to best response